Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information

Authors: Fleming, Michael J.1; Remolona, Eli M.2

Source: The Journal of Finance, Volume 54, Number 5, October 1999 , pp. 1901-1915(15)

Publisher: Blackwell Publishing

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Abstract:

The arrival of public information in the U.S. Treasury market sets off a two-stage adjustment process for prices, trading volume, and bid-ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.

Document Type: Research article

DOI: 10.1111/0022-1082.00172

Affiliations: 1: Federal Reserve Bank of New York, 2: Bank for International Settlements and the Federal Reserve Bank of New York

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