The Quality of the Italian Treasury Bond Market, Asymmetric Information and Transaction Costs

This paper analyzes the microstructure of the Italian secondary bond market and of the effects of the 1994 reform and of the introduction of anonymity in 1997. Based on a microstructure model of price formation, we evaluate the relevance of asymmetric information and other microstructure effects, by estimating the VAR representation of the model. We find that market quality improves over time, which we interpret as resulting from the 1994 reform. This is captured both by decreased first order return autocorrelation and by improvement of our market quality indicators. The introduction of anonymity substantially reduces order fragmentation by investors trying to avoid free-riding by less sophisticated traders. No significant evidence of asymmetric information is found.