Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät, Universität Hannover 493
This paper shows that order flow determines future bond excess returns. This effect cannot be captured by macroeconomic or forward rate information. To understand how these variables influence future bond excess returns, we decompose excess returns into expected and unexpected excess returns. Expected returns crucially depend on the available information set which is spanned by order flow, forward rates and macroeconomic variables. Thus, the predictability of bond excess returns stems from the strong linkage of expected excess returns to available economic information and order flow. The analysis of unexpected excess returns reveals contemporaneous order flow and changes of the economic environment as main drivers.