Order Flow Imbalance And Treasury Bonds Yield

The Fixed Income Securities Flat in Shanghai Stock Exchange was established in July25,2007. It features the market maker mechanism and is aimed at providing a bridge betweeninterbank bond market and the exchange market to improve bond market liquidity and tofacilitate the formation of reliable Treasury bond yield curve. In this paper, intraday tradingand quotation data on the Fixed Income Securities Flat are used. By studying the empiricalrelationship between Treasury bond yield and order flow imbalance, I want to test the pricediscovery mechanism and the efficiency of the flat. Order flow imbalance (excess buying orselling pressure) is a proxy for private information and is widely used in the study of foreignexchange market, stock market and western bond market. In my paper I use net order numberwhich is got by summing the signed trade of a certain group of Treasury bonds within eachtrading days. And to control the impact of past yield and macro-economic factors, laggedfactor of yield is introduced and the trading days are divided into macro-news days and nomacro-news days. The results show price discovery really exists on the Fixed IncomeSecurities Flat. However different type of net order flow has different impact on the Treasurybond yields. Besides, the price discovery effect is not strong because of a series of problemson the flat. So suggestions are given to improve its effectiveness. For example, first the markettransparency should be improved; second, the market maker mechanism should be furtherdeveloped; third, term structure should be optimized; and forth, holders’ structure should beoptimized.