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Financial networks and trading in bond markets

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  • Booth, G. Geoffrey
  • Gurun, Umit G.
  • Zhang, Harold

Abstract

We examine how financial networks influence asset prices and trading performance. Consistent with theoretical studies on the role of communication networks in information dissemination, we posit that global financial institutions, having more extensive and strategic financial networks, can more efficiently acquire and process information pertaining to asset trading due to their better access to order flows and, thus, have better trading performance than local financial institutions with less extensive and strategic financial networks. Using transaction level Turkish government bond trading data, we find that global financial institutions exhibit a stronger tendency to trade in more liquid bonds and consistently trade at more favorable prices than local financial institutions, suggesting that global financial institutions have an informational advantage. They also enjoy better trading performance on informed trades but this informational advantage tends to decline over time, indicating possible learning by local financial institutions as a result of trading with their global financial counterparts.

Suggested Citation

  • Booth, G. Geoffrey & Gurun, Umit G. & Zhang, Harold, 2014. "Financial networks and trading in bond markets," Journal of Financial Markets, Elsevier, vol. 18(C), pages 126-157.
    • Handle: RePEc:eee:finmar:v:18:y:2014:i:c:p:126-157
    DOI: 10.1016/j.finmar.2013.08.001
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    3. Oriol, Nathalie & Rufini, Alexandra & Torre, Dominique, 2018. "Fifty-shades of grey: Competition between dark and lit pools in stock exchanges," Information Economics and Policy, Elsevier, vol. 45(C), pages 68-85.
    4. Temizsoy, Asena & Iori, Giulia & Montes-Rojas, Gabriel, 2017. "Network centrality and funding rates in the e-MID interbank market," Journal of Financial Stability, Elsevier, vol. 33(C), pages 346-365.
    5. Jieun Lee, 2018. "Who Improves or Worsens Liquidity in the Korean Treasury Bond Market?," Working Papers 2018-3, Economic Research Institute, Bank of Korea.
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    7. Cécile Bastidon & Myriam Bontonou & Pierre Borgnat & Pablo Jensen & Patrice Abry & Antoine Parent, 2024. "Learning smooth graphs with sparse temporal variations to explore long-term financial trends," Post-Print hal-04731912, HAL.

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    More about this item

    Keywords

    Financial networks; Informational advantage; Bond market trading;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements

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