Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53889
Authors: 
Chung, Christopher
Campbell, Bryan
Hendry, Scott
Year of Publication: 
2007
Series/Report no.: 
Bank of Canada Working Paper 2007,4
Abstract: 
In this paper we look at the relative information content of cash and futures prices for Canadian Government bonds. We follow the information-share approaches introduced by Hasbrouck (1995) and Harris et al (1995), applying the techniques in Gonzalo-Granger (1995), to evaluate the relative contributions of trading in the cash and futures markets to the price discovery process. Both approaches estimate a vector error correction model that permits the separation of long-run price movements from short-run market microstructure effects. As well, we follow Yan and Zivot (2004) who introduce size measures of a market's adjustment to a new equilibrium during the price discovery process. We find that, on an average day, just over 70% of price discovery occurs on the futures market where bid-ask spreads are lower and trading activity is higher. The size of the responses to shocks and the time taken to adjust to a new equilibrium are found to be significantly larger for the cash market.
Subjects: 
Financial markets
Market structure and pricing
JEL: 
G12
G13
G14
Document Type: 
Working Paper
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