Abstract:
The paper analyses the information content of trades in Bund futures and German
government bonds before and during the 1998 financial market turbulences and tests
whether the contributions to price discovery of the two market segments were constant over
time. The results suggest that, under the normal market conditions prevailing in the first half
of the year, between 19% and 33% of the variation in the efficient price was due to trading in
the spot market. In the aftermath of the recapitalisation of LTCM, by contrast, the bond
market's share in price discovery dropped to zero, with information becoming incorporated
into prices only in the futures market. This decline can be traced to an unusually high
proportion of large client trades that were executed against dealer inventory, which suggests
that they were primarily motivated by liquidity rather than by information. On the
methodological side, the paper computes information shares and factor weights based on the
Gonzalo-Granger decomposition in markets with different trading frequencies. In addition, the
paper captures variations over time by using a sequence of break point tests.
