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Measuring treasury market liquidity

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Author Info
Michael J. Fleming

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Abstract

This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. Securities liquidity is important to those who transact in markets, those who monitor market conditions, and those who analyze market developments. This article estimates and evaluates a comprehensive set of liquidity measures for the U.S. Treasury securities market. The author finds that the commonly used bid-ask spread-the difference between bid and offer prices-is a useful measure for assessing and tracking liquidity. The spread is highly correlated with a more sophisticated price impact measure and is correlated with episodes of reported poor liquidity in the expected manner. He also finds that other measures correlate less strongly with episodes of poor liquidity and with the bid-ask spread and price impact measures, indicating that they are only modest proxies for market liquidity. Trading volume and trading frequency, in particular, are found to be weak proxies for market liquidity, as both high and low levels of trading activity are associated with periods of poor liquidity.

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Publisher Info
Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2003)
Issue (Month): Sep ()
Pages: 83-108
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Handle: RePEc:fip:fednep:y:2003:i:sep:p:83-108:n:v.9no.3

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Related research
Keywords: Liquidity (Economics) ; Treasury bills ; Treasury notes ; Government securities;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April. [Downloadable!] (restricted)
  2. Huberman, G. & Halka, D., 1999. "Systematic Liquidity," Papers 99-9, Columbia - Graduate School of Business.
  3. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  4. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
  5. Paul Bennett & Kenneth Garbade & John Kambhu, 1999. "Enhancing the Liquidity of U.S. Treasury Securities in an Era of Surpluses," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-083, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  6. Huang, Roger D. & Cai, Jun & Wang, Xiaozu, 2002. "Information-Based Trading in the Treasury Note Interdealer Broker Market," Journal of Financial Intermediation, Elsevier, vol. 11(3), pages 269-296, July. [Downloadable!] (restricted)
  7. Sarig, Oded & Warga, Arthur, 1989. "Bond Price Data and Bond Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 367-378, September. [Downloadable!]
  8. Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-32. [Downloadable!]
  9. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York. [Downloadable!]
  10. Robert F. Engle & Joe Lange, 1997. "Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market," University of California at San Diego, Economics Working Paper Series 97-12r, Department of Economics, UC San Diego. [Downloadable!]
    Other versions:
  11. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August. [Downloadable!] (restricted)
  12. Edwin J. Elton & T. Clifton Green, 1998. "Tax and Liquidity Effects in Pricing Government Bonds," Journal of Finance, American Finance Association, vol. 53(5), pages 1533-1562, October. [Downloadable!] (restricted)
  13. Martin D. D. Evans & Richard K. Lyons, 2002. "Order Flow and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 170-180, February. [Downloadable!] (restricted)
    Other versions:
  14. Martin D. D. Evans(Georgetown University and NBER), . "What are the Origins of Foreign Exchange Movements?," Working Papers gueconwpa~05-05-06, Georgetown University, Department of Economics. [Downloadable!]
  15. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 7(4), pages 631-51. [Downloadable!] (restricted)
  16. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
    Other versions:
  17. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 73-114, June. [Downloadable!] (restricted)
  18. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November. [Downloadable!] (restricted)
  19. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June. [Downloadable!] (restricted)
  20. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, 04. [Downloadable!] (restricted)
  21. Dominique Dupont & Brian Sack, 1999. "The Treasury securities market: overview and recent development," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 785-806. [Downloadable!]
  22. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March. [Downloadable!]
  23. Paul Bennett & Kenneth Barbade & John Kambhu, 2000. "Enhancing the liquidity of U.S. Treasury securities in an era of surpluses," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 89-119. [Downloadable!]
  24. Tanner, J Ernest & Kochin, Levis A, 1971. "The Determinants of the Difference Between Bid and Ask Prices on Government Bonds," Journal of Business, University of Chicago Press, vol. 44(4), pages 375-79, October. [Downloadable!] (restricted)
  25. Kamara, Avraham, 1994. "Liquidity, Taxes, and Short-Term Treasury Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 403-417, September. [Downloadable!]
  26. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March. [Downloadable!] (restricted)
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