Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve

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In this Subject: Finance
By this author: MICHAEL W. BRANDT ;&nbsp; KENNETH A. KAVAJECZ

Authors: MICHAEL W. BRANDT; KENNETH A. KAVAJECZ

Source: The Journal of Finance, Volume 59, Number 6, December 2004 , pp. 2623-2654(32)

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Abstract:

We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) account for up to 26% of the day-to-day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity is low. All of the evidence points toward an important role of price discovery in understanding the behavior of the yield curve.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1540-6261.2004.00711.x

Publication date: 2004-12-01