ABSTRACT

Recent advances in financial economics have emphasized that market players are asymmetrically informed about asset values and that financial market transactionsmay convey private information about fundamental values. Moreover, the level of information asymmetry varies across securities (Hasbrouck 1991a, 1991b) and with market conditions (Dufour and Engle 2000). Although most empirical studies examine equity markets, there is a growing consensus on the relevance of asymmetric information in other markets as well. For instance, considering the origin of the 2007 subprime-mortgage market crisis, Calomiris (2009) claims that asymmetric information has crucially affected credit spreads. More importantly for our study, information asymmetry seems to be relevant even when market participants may fully agree on the future notional cash flows of a security, such as in the Treasury market (Brandt and Kavajecz 2004; Pasquariello andVega 2007).