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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

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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Bibliographic 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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Keywords: Financial markets;

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References

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  1. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2005. "Real-Time Price Discovery in Stock, Bond and Foreign Exchange Markets," NBER Working Papers 11312, National Bureau of Economic Research, Inc.
  2. Bruce Mizrach & Christopher J. Neely, 2007. "The microstructure of the U.S. treasury market," Working Papers, Federal Reserve Bank of St. Louis 2007-052, Federal Reserve Bank of St. Louis.
  3. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 1-37.
  4. Neil Shephard & Ole Barndorff-Nielsen, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Series Working Papers 2004-FE-01, University of Oxford, Department of Economics.
  5. Bandi, Federico M. & Nguyen, Thong H., 2003. "On the functional estimation of jump-diffusion models," Journal of Econometrics, Elsevier, Elsevier, vol. 116(1-2), pages 293-328.
  6. Peter Carr & Liuren Wu, 2003. "What Type of Process Underlies Options? A Simple Robust Test," Journal of Finance, American Finance Association, American Finance Association, vol. 58(6), pages 2581-2610, December.
  7. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," NBER Working Papers 8160, National Bureau of Economic Research, Inc.
  8. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Research Paper 9706, Federal Reserve Bank of New York.
  9. LAHAYE, Jérôme & LAURENT, Sébastien & NEELY, Christopher J., . "Jumps, cojumps and macro announcements," CORE Discussion Papers RP -2413, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  10. Yacine Aït-Sahalia, 2002. "Telling from Discrete Data Whether the Underlying Continuous-Time Model Is a Diffusion," Journal of Finance, American Finance Association, American Finance Association, vol. 57(5), pages 2075-2112, October.
  11. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1996. "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, New York University, Leonard N. Stern School of Business- 96-13, New York University, Leonard N. Stern School of Business-.
  12. Alessandro Beber & Michael W. Brandt, 2006. "Resolving Macroeconomic Uncertainty in Stock and Bond Markets," NBER Working Papers 12270, National Bureau of Economic Research, Inc.
  13. 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, American Finance Association, vol. 54(5), pages 1901-1915, October.
  14. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 59(3), pages 1201-1234, 06.
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Cited by:
  1. Jean-Yves Gnabo & Jér�me Lahaye & Sébastien Laurent & Christelle Lecourt, 2012. "Do jumps mislead the FX market?," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 12(10), pages 1521-1532, October.
  2. Boudt, Kris & Croux, Christophe & Laurent, Sébastien, 2011. "Robust estimation of intraweek periodicity in volatility and jump detection," Journal of Empirical Finance, Elsevier, Elsevier, vol. 18(2), pages 353-367, March.

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