Investigating the effect of Trading volume on Bid-Ask spread of Islamic treasury bills with a Microstructural approach

Namaki, Ali; Kazemi Bavil, Aysa

doi:10.61186/ijf.2024.431669.1452

Investigating the effect of Trading volume on Bid-Ask spread of Islamic treasury bills with a Microstructural approach

Document Type : Original Article

Authors

Ali Namaki ¹

Aysa Kazemi bavil ²

¹ Assistant Prof., Department of Markets and Financial Institutions, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

² MSc. Student. Department of Markets and Financial Institutions, Faculty of Accounting and Financial Sciences, College of Management, University of Tehran, Tehran, Iran.

10.61186/ijf.2024.431669.1452

Abstract

As a key tool in implementing monetary policy and government financing, government bonds play an essential role in financial markets. By means of Islamic financial innovations in the Islamic capital market, the instrument of Islamic treasury bill is published and tradable in the over-the-counter market. Islamic treasury bills have many risks in terms of execution, including the ease of trading and liquidity in the secondary market. Therefore, this research aims to examine some microstructural elements of government bonds using a vector autoregressive model. In this article, the effect of trading volume on bid-ask spread of orders has been investigated. To survey the impact of these variables, the vector autoregressive (VAR) model has been used on intraday data of 17 symbols of Islamic treasury bills in the over-the-counter market, which had the most trading days from 2021 to September 2023. According to the studies, there is a significant relationship between the trading volume and bid-ask spread only in Islamic treasury bills with long-term maturity. Therefore, the effect of the bid-ask spread of orders in different periods is greater than the trading volume, especially in longer-term Islamic treasury bills. Hence, in this research, by analyzing the impulse response function, if there is a shock on the variables, the effect of the trading volume's shock remains for several periods and affects unremarkably the bid-ask spread of orders in most of the short-term and long-term Islamic treasury bills, while effects of the bid-ask spread shocks during initial periods for long-term and short-term Islamic treasury bills is excellent, but decrease sharply during the following periods. These results help traders pay attention and reduce the risk of trading in the over-the-counter market, specifically the long-term treasury bills.

Keywords

Islamic treasury bills

Trading volume

Bid-Ask Spread

Information asymmetry

Market microstructure

Barakchian, S. M. & Seyedsalehi, M. H. (2022). The Effects of Order Flow Imbalance on Stock Prices in Tehran Stock Exchange. Journal of Financial Management Perspective, 12(40), 9–27. (in Persian)

Copeland, T. E., and Galai, D. (1983). Information Effects on the Bid-Ask Spread. The Journal of Finance, 38(5), 1457–1469.

Easley, D., & O'Hara, M. (1987). Price, trade size, and information in securities markets. Journal of Financial Economics, 19(1), 69–90.

Easley, D., & O'Hara, M. (1992). Time and the Process of Security Price Adjustment. The Journal of Finance, 47(2), 577–605.

Easley, D., Engle, R.F., O'Hara, M. & Wu, L. (2008). Time varying arrival rates of informed and uninformed trades. Journal of Financial Econometrics, 6(2), 171–207.

Fleming, M. J., and Remolona, E. M. (1999). Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information. Journal of Finance, 54(5), 1901–1915.

Fleming, M. J. (2001). Measuring Treasury Market Liquidity. FRB of New York Staff Report, p. 133.

Fleming, M. J., Mizrach, B., & Nguyen, G. (2017). The Microstructure of a U.S. Treasury ECN: The BrokerTec Platform. Journal of Financial Markets, pp. 40, 2–22.

Fleming, M. J., Mizrach, B., & Nguyen, G. (2018). The microstructure of a U.S. Treasury ECN: The BrokerTec platform. Journal of Financial Markets, pp. 40, 2–22.

Fleming, M. J., Nguyen, G., Engle, R., & Ghysels, E. (2020). Liquidity and Volatility in the U.S. Treasury Market. Journal of Econometrics, 217(2), 207–229.

Fleming, M. J., and Ruela, F. (2020). Treasury Market Liquidity during the COVID-19 Crisis. Federal Reserve Bank of New York Staff Reports.

Hasbrouck, J. (1991). Measuring the Information Content of Stock Trades. Journal of Finance, 46(1), 178–208.

Hasbrouck, J. (1995). One Security, Many Markets: Determining the Contributions to Price Discovery. The Journal of Finance, 50(4), 1175–1199.

Handa, P. & Schwartz, R. (1996). Limit Order Trading. Journal of Finance, 51(5), 1835–1861.

Hosseini, S. Fatemeh, Raei, Reza, & Mohammadi, Shapour (2022). Intraday Liquidity and Return Dependency Structure Modeling of a Portfolio in Tehran Stock Exchange with ACP-GARCH-High Dimension Vine Copula. Journal of Financial Management Strategy Alzahra University, 9(35), 1–20. (in Persian)

Glosten, L. R., & Milgrom, Paul R. (1985). Bid, ask, And Transaction Prices in a Specialist Market with Heterogeneously Informed Agents. Journal of Financial Economics, 14(1),71-100.

Kheradyar, S., Maleki, M., and Pourreza, A. (2020). Islamic Treasury Bills: New Instrument for Financing. Accounting and Auditing Studies, 9(34), 67-82. (in Persian)

Kyle, A. S. (1985). Continuous Auctions and Insider Trading. Econometrica, 53(6), 1315–1335.

Lee, B.S., and Rui, O.M. (2002). The dynamic relationship between stock returns and trading volume: Domestic and cross-country evidence. Journal of Banking & Finance, 26(1), 51-78.

Lin, H., Lo, I., & Qiao, R. (2021). Macroeconomic news announcements and market efficiency: Evidence from the U.S. Treasury market. Journal of Banking & Finance, p. 133, 106252.

Mizrach, B., and Neely, C. J. (2008). Information shares in the U.S. Treasury market. Journal of Banking and Finance, 32(7), 1221-1233.

Nazarpour, M. N., and Sadraei, M. H. (2017). Identification and Ranking of Islamic Treasury Bills' Risks in Iran's Securities Market. Scientific Journal of Islamic Finance Researches (IFR), 6(2), 133-166. (in Persian)

Pouyanfar, A., Raei, R., and Mohammadi, S. (2009). Transactional Prices Intraday Evidence from Tehran Stock Exchange. Accounting and Auditing Review, 16(2). (in Persian)

Pasquariello, P., and Vega, C. (2007). Informed and Strategic Order Flow in the Bond Markets. Review of Financial Studies, 20(6), 1975-2019.

Pourhosseini, S. H., Sharifi Renani, H., and Daei-Karimzadeh, S. (2022). The analysis of relationship between financial markets' illiquidity shocks and macroeconomicdynamics: Time-varying parameter vector autoregression (TVP-VAR) approach in Iran. Financial Management Perspective, 12(39), 63-82. (in Persian)

Rashidi D, Vaez M, Bakhshi R. (2022). Analysis of the Impact of Alternative Method of Financing the Government Budget Deficit through Issuing Treasury Bills on Economic Variables: DSGE Approach. Journal of Money and Economy, 17(4), 513–546. (in Persian)

Tohidi, M. (2021). An Analysis of the Jurisprudential Aspects of the Islamic Treasury Bills Issued in Iran. Scientific Journal of Budget and Finance Strategic Research, 1(4), 11–44. (in Persian)

Vega, C. (2006). Stock price reaction to public and private information. Journal of Financial Economics, 82(1), 103–133.

Vega, C., and Miller, C.S. (2009). Market Microstructure Division of International Finance. Board of Governors of the Federal Reserve System, Springer, New York, 5392–5404.