Price Dynamics and Information Flows in Strategically-Linked Debt Instruments: The NOB and MOB Constituents

We examine information flows between the constituents of the NOB (notes-over-bonds) and MOB (municipals-over-bonds) futures spreads. The results suggest a bicausal relationship between notes and bonds and a unicausal relationship from bonds to municipals. Shocks in the bond market have a large impact on the municipal and note markets, whereas shocks in the municipal or note markets have a smaller impact on the bond market. Volatility spillover from bonds to notes and municipals is detected. We also find significant volatility persistence in all three markets. Spread trades are found to have an asymmetric influence on notes and municipal futures variance. Copyright Blackwell Publishers Ltd 2000.