Computer-Based Trading, Institutional Investors and Treasury Bond Returns

Abstract

This study provides a comprehensive analysis of the effects of Computer-based Trad-ing (CBT) on Treasury bond expected returns. We document a strong relationship between bond expected returns and the overall intensity at which CBT takes place in the Treasury market. Investing in bonds with the largest beta to the aggregate CBT intensity and shorting those with the smallest generates large and significant returns. Those returns are not due to compensation for facing conventional sources of risk or to transaction costs. Our results are consistent with capital-flow based explanations implied by asset pricing models with institutional investors.