Challenging the Spanning Hypothesis at Short Horizons - Evidence from Norway

This paper challenges the spanning hypothesis, stating that the current yield curve contains all information relevant for forecasting yields, by investigating the predictive power of bond market order flows. Using a data set from the Norwegian government bond market not suffering from the "standard error bias", the results show that inter-dealer order flows, corrected for the information in the current yield curve, predict yield changes and excess returns both in-sample and out-of-sample at the daily and weekly horizons. The predictive power of order flows vary across dealers suggesting that predictive power of order flows stem from heterogeneous private information