Time-Varying Price Discovery in the European Treasury Markets

We study the price discovery process in Euro area government bond markets. We analyze the most active German, French, Italian and Spanish sovereign securities traded on the MTS electronic inter-dealer markets for various maturity buckets. We find that the level of contribution to the price discovery process by the bonds of a certain country changes within each maturity bucket. The French market takes price leadership at the short maturity while the German market is more informative at the medium and long maturities. Importantly, we find that the speed of the yield adjustment to the long-term equilibrium relationship among yields varies over time and can be affected by certain explanatory variables. Our results show that economic news announcements reinforce information contributions to the common efficient interest rate and, consequently, lead to larger and faster yield adjustments