Alfonso Dufour

Permanent trading impacts and bond yields

We analyse four years of transaction data for euro-area sovereign bonds traded on the MTS electronic platforms. In order to measure the informational content of trading activity, we estimate the permanent price response to trades. We not only find strong evidence of information asymmetry in sovereign bond markets, but also show the relevance of information asymmetry in explaining the cross-sectional variations of bond yields across a wide range of bond maturities and countries. Our results confirm that trades of more recently issued bonds and longer maturity bonds have a greater permanent effect on prices. We compare the price impact of trades for bonds across different maturity categories and find that trades of French and German bonds have the highest long-term price impact in the short maturity class, whereas trades of German bonds have the highest permanent price impact in the long maturity class. More importantly, we study the cross-section of bond yields and find that after controlling for conventional factors, investors demand higher yields for bonds with larger permanent trading impact. Interestingly, when investors face increased market uncertainty, they require even higher compensation for information asymmetry.

Information entropy and measures of market risk

In this paper we investigate the relationship between the information entropy of the distribution of intraday returns and intraday and daily measures of market risk. Using data on the EUR/JPY exchange rate, we find a negative relationship between entropy and intraday Value-at-Risk, and also between entropy and intraday Expected Shortfall. This relationship is then used to forecast daily Value-at-Risk, using the entropy of the distribution of intraday returns as a predictor.

Degrees of Specialness: An Empirical Analysis of the Italian BTP Repo Market

We explain the variation in the degree of specialness for bonds used as collateral in the Italian Government BTP repo market. Some of our results are similar to the findings in the US repo market even though the underlying Italian BTP bond market is structurally different than the US Treasury market. Specifically liquidity, supply and demand are significant factors that help determine the degree of specialness. Unlike US repo studies however, we find that credit risk and information uncertainty also affect the degree of repo specialness.

Euro Area Government Bond Market Liquidity

We study the contribution of liquidity to time-series dynamics and cross-sectional variations of Euro area sovereign bond yield spreads. We consider a large sample period covering both the global financial crisis and the European sovereign crisis. Using intraday trade and quote data we construct several alternative liquidity measures and study their contribution to yield preads. When we control for standard risk factors, such as credit and term, liquidity does not provide a significant incremental explanatory contribution to the time-series dynamics of yields before the crisis period. Liquidity however becomes an important explanatory factor during the crisis period. In the cross-sectional analysis liquidity plays an important role in explaining yield spreads both before and during the crisis period. Amongst the various liquidity proxies the bid-ask spread consistently provides the largest incremental contribution to models for yield spreads.

Intraday Dynamics and Determinants of CCP and Bilateral General-Collateral Repos

We study the spread between the intraday general collateral repo rate on Italian Government bonds and the ECB deposit rate, using a novel dataset. We focus on overnight repos, both cleared by central counterparty (CCP) and traded bilaterally. We observe that collateral supply, liquidity and duration affect significantly the repo riskiness and spread, but they have a reduced impact after the ECB quantitative easing interventions. Increased margins during the European sovereign crisis (ESC) further deteriorate the repo funding costs (pro-cyclical effect). Once we control for the impact of margin costs, the CCP repo appears not be significantly cheaper than the bilateral repo. Finally, we show that bonds with lower liquidity, greater supply, longer duration, and lower specialness are more likely to be selected as collateral. However, during the ESC, CCP-repo buyers tend to provide as collaterals bonds with higher liquidity and lower duration to reduce margin and repo trading costs.

Explaining Repo Specialness

We study the dynamics of specialness for 1-day repo contracts on Italian Government bonds over a 10-year sample period. Our results show that collateral supply is a significant factor for specialness, along with repo liquidity, information uncertainty and short-selling proxies that reveal the importance of speculative bond demand for specialness. We identify recurrent patterns for specialness around bond auctions. Specialness increases steadily from the auction announcement date until few days before the auction settlement date, which is consistent with an overbidding behaviour of primary dealers. During crisis periods, bond fire-sales and ECB interventions have a large impact on repo specialness.

Preliminary Data Analysis

When comparing the volatility of stocks trading on different markets, it is important to compare stocks that have similar features in terms of market capitalization or size, industry grouping, age and liquidity. AIM stocks have substantially smaller market capitalization than Main Market stocks. Very few Main Market stocks have market capitalization lower than £5m and very few AIM stocks have market capitalization larger than £200m.

Relative Risk Allowing for Size, Age or Liquidity

We then considered size, age and industry effects on volatility. The results suggested that larger stocks are generally less volatile than smaller stocks, and also that small AIM stocks are significantly more volatile than comparable Main Market stocks.

Regression Analyses with Multiple Variables

In the multivariate regression analysis we used the main risk-related variables (size, industry, age and market) to explain differences in volatility. Our results suggested that AIM stocks are significantly more volatile, although the difference is far smaller than that given by the simple ratio analysis. However the strong correlation between age and market on which the stock is listed makes it difficult for a regression to distinguish the impact of the two variables.

Basic Analysis of Relative Volatility

First, we conducted an analysis of comparable stocks that did not switch markets. A simple ratio analysis comparing the annual volatility of AIM and Main Market stocks showed AIM to be substantially more volatile than the Main Market. The volatility of AIM stocks ranged from 1.3 to 2.7 times that of comparable Main Market stocks, and was particularly high in 2005 and 2006.