Financial Networks and Trading in Bond Markets

Abstract

This paper examines how financial networks influence asset prices and trading performance. Consistent with theoretical studies on the role of communication networks in information dissemination, we posit that financial institutions with more extensive financial networks can more efficiently acquire and process information pertaining to asset trading thus have better trading performance than financial institutions with limited financial networks. Using transaction-level Turkish government bond trading data, we find that financial institutions with global financial networks exhibit a stronger tendency to trade in the more liquid bonds and consistently trade at more favorable prices suggesting that global financial institutions have information advantages. They enjoy better trading performance than local financial institutions on informed trades. The information advantage afforded global financial institutions tends to decline over time suggesting possible learning by local financial institutions as a result of trading with global financial institutions.