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Informed Trading in Government Bond Markets

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  • Lou, Dong

Abstract

Using comprehensive administrative data from the UK, we examine trading by different investor groups in government bond markets. Our sample covers virtually all secondary market trading in gilts and contains detailed information of each transaction, including the identities of both counterparties. We find that hedge funds’ daily trading positively forecasts gilt returns in the following one to five days, which is then fully reversed in the following month. A part of this short-term return predictability is due to hedge funds’ front-running other investors’ future demand. Mutual fund trading also positively predicts gilt returns, but over a longer horizon of one to two months. This return pattern does not revert in the following year and is partly due to mutual funds’ ability to forecast changes in short-term interest rates.

Suggested Citation

  • Lou, Dong, 2020. "Informed Trading in Government Bond Markets," CEPR Discussion Papers 15028, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15028
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    Cited by:

    1. Di Gangi, Domenico & Lazarov, Vladimir & Mankodi, Aakash & Silvestri, Laura, 2022. "Links between government bond and futures markets: dealer-client relationships and price discovery in the UK," Bank of England working papers 991, Bank of England.
    2. Czech, Robert & Pintér, Gábor, 2020. "Informed trading and the dynamics of client-dealer connections in corporate bond markets," Bank of England working papers 895, Bank of England, revised 20 Jan 2022.

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    Keywords

    Government bonds; Informed trading; Return predictability; Asset managers;
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