Forecasting short term yield changes using order flow: Is dealer skill a source of predictability?

This paper introduces bond market order flow as a predictor variable in term structuremodels and provides evidence that order flow has forecasting ability over and above thatof forward rates. Both in-sample and out-of-sample forecasts show that models includ-ing interdealer order flow outperform traditional term structure models and the randomwalk model. This indicates that bond order flow contains information about future bondprices that is not fully incorporated into the current yield curve. To identify the source ofpredictability in order flow the paper compares the predictive power of individual dealerorder flow...