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Market-making costs in Treasury bills: A benchmark for the cost of liquidity

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  • Griffiths, Mark D.
  • Lindley, James T.
  • Winters, Drew B.
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    Abstract

    We focus on market-making costs by examining the daily bid-ask spreads for off-the-run, one-month Treasury bills around two liquidity-changing events. Event one, Salomon Brothers' supply shock, results in a roughly 2.5-basis-point increase in the spread because of an increase in ask prices; and event two, the Long-Term Capital Management demand shock, results in a doubling of the spread because of a decrease in bid prices. Our results provide a benchmark for researchers examining bid-ask spreads of securities that include a liquidity premium, a risk premium, and an asymmetric information premium.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 9 (September)
    Pages: 2146-2157

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2146-2157

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Liquidity Bid-ask spread Market-making costs;

    References

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    Cited by:
    1. Andrade, Sandro C. & Barrett, W. Brian, 2011. "Can broker-dealer client surveys provide signals for debt investing?," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1170-1178, May.
    2. Mitra, Sovan & Date, Paresh & Mamon, Rogemar & Wang, I-Chieh, 2013. "Pricing and risk management of interest rate swaps," European Journal of Operational Research, Elsevier, vol. 228(1), pages 102-111.
    3. Marini, Fran├žois, 2011. "Financial intermediation in the theory of the risk-free rate," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1663-1668, July.
    4. Akay, Ozgur (Ozzy) & Cyree, Ken B. & Griffiths, Mark D. & Winters, Drew B., 2012. "What does PIN identify? Evidence from the T-bill market," Journal of Financial Markets, Elsevier, vol. 15(1), pages 29-46.

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