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

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Author Info
MICHAEL W. BRANDT
KENNETH A. KAVAJECZ
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. Copyright 2004 by The American Finance Association.

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Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 59 (2004)
Issue (Month): 6 (December)
Pages: 2623-2654
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Handle: RePEc:bla:jfinan:v:59:y:2004:i:6:p:2623-2654

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  1. José Ramón Martínez-Resano, 2005. "Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds," Banco de España Occasional Papers 0501, Banco de España. [Downloadable!]
  2. Mardi Dungey & Charles Goodhart & Demosthenes Tambakis, 2008. "The US treasury market in August 1998: untangling the effects of Hong Kong and Russia with high-frequency data," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 40-52. [Downloadable!]
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  3. Riccardo Rebonato & Valerio Gaspari, 2006. "Analysis of drawdowns and drawups in the US$ interest-rate market," Quantitative Finance, Taylor and Francis Journals, vol. 6(4), pages 297-326, August. [Downloadable!] (restricted)
  4. J.Ramon Martinez-Resano, 2005. "Size And Heterogeneity Matter. A Microstructure-Based Analysis Of Regulation Of Secondary Markets For Government Bonds," Finance 0508007, EconWPA. [Downloadable!]
  5. Craig H. Furfine & Eli M. Remolona, 2005. "Price discovery in a market under stress: the U.S. Treasury market in fall 1998," Working Paper Series WP-05-06, Federal Reserve Bank of Chicago. [Downloadable!]
  6. Martin D. D. Evans(Georgetown University and NBER) and Richard K. Lyons(U.C. Berkeley and NBER, Haas School of Business), . "How is Macro News Transmitted to Exchange Rates? (December 2003)," Working Papers gueconwpa~05-05-05, Georgetown University, Department of Economics. [Downloadable!]
  7. Albuquerque, Rui & Vega, Clara, 2006. "Asymmetric Information in the Stock Market: Economic News and Co-movement," CEPR Discussion Papers 5598, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2007. "Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets," CREATES Research Papers 2007-20, School of Economics and Management, University of Aarhus. [Downloadable!]
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  9. Torben G. Andersen & Luca Benzoni, 2007. "Do Bonds Span Volatility Risk in the U.S. Treasury Market? A Specification Test for Affine Term Structure Models," CREATES Research Papers 2007-25, School of Economics and Management, University of Aarhus. [Downloadable!]
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  10. Yong Chen & Wayne Ferson & Helen Peters, 2009. "Measuring the Timing Ability and Performance of Bond Mutual Funds," NBER Working Papers 15318, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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