Economic News and the Impact of Trading on Bond Prices

This paper studies the impact of government bond trading on transaction prices surrounding the release of economic news. I find a significant increase in the adverse selection component of the bid-ask spread following economic announcements, which suggests a rise in the level of information asymmetry and an increase in the informational role of trading. The increased informational component of the spread is larger after announcements with greater price impact, and is related to the precision of the public information. The results suggest that trading facilitates the process by which new information is incorporated into prices, and highlights the importance of information asymmetry as a determinant of transaction costs in the government bond market.

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