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Information Shocks, Jumps, and Price Discovery -- Evidence from the U.S. Treasury Market

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Author Info
George J. Jiang
Ingrid Lo
Adrien Verdelhan

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Abstract

We examine large price changes, known as jumps, in the U.S. Treasury market. Using recently developed statistical tools, we identify price jumps in the 2-, 3-, 5-, 10-year notes and 30-year bond during the period of 2005-2006. Our results show that jumps mostly occur during prescheduled macroeconomic announcements or events. Nevertheless, market surprise based on preannouncement surveys is an imperfect predictor of bond price jumps. We find that a macroeconomic news announcement is often preceeded by an increase in market volatility and a withdrawal of liquidity, and that liquidity shocks play an important role for price jumps in U.S. Treasury market. More importantly, we present evidence that jumps serve as a dramatic form of price discovery in the sense that they help to quickly incorporate market information into bond prices.

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File URL: http://www.bankofcanada.ca/en/res/wp/2008/wp08-22.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 08-22.

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Length: 48 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:bca:bocawp:08-22

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Related research
Keywords: Financial markets;

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
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  1. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  2. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1201-1234, 06. [Downloadable!] (restricted)
  3. Peter Carr & Liuren Wu, 2003. "What Type of Process Underlies Options? A Simple Robust Test," Journal of Finance, American Finance Association, vol. 58(6), pages 2581-2610, December. [Downloadable!] (restricted)
    Other versions:
  4. Ole E. Barndorff-Nielsen & Neil Shephard, 2006. "Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation," Journal of Financial Econometrics, Oxford University Press, vol. 4(1), pages 1-30. [Downloadable!] (restricted)
    Other versions:
  5. Nikolaus Hautsch & Dieter Hess & Christoph Müller, 2008. "Price Adjustment to News with Uncertain Precision," FRU Working Papers 2008/01, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
    Other versions:
  6. Yacine Ait-Sahalia, 2001. "Telling from Discrete Data Whether the Underlying Continuous-Time Model is a Diffusion," NBER Working Papers 8504, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. 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:
  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March. [Downloadable!] (restricted)
    Other versions:
  9. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Oxford University Press, vol. 2(1), pages 1-37. [Downloadable!] (restricted)
    Other versions:
  10. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2003. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," PIER Working Paper Archive 04-028, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jun 2004. [Downloadable!]
    Other versions:
  11. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October. [Downloadable!] (restricted)
  12. Jérôme Lahaye & Sébastien Laurent & Christopher J. Neely, 2007. "Jumps, cojumps and macro announcements," Working Papers 2007-032, Federal Reserve Bank of St. Louis. [Downloadable!]
  13. Mardi Dungey & Michael McKenzie & Vanessa Smith, 2007. "Empirical Evidence On Jumps In The Term Structure Of The Us Treasury Market," CAMA Working Papers 2007-25, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
  14. Bandi, Federico M. & Nguyen, Thong H., 2003. "On the functional estimation of jump-diffusion models," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 293-328. [Downloadable!] (restricted)
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