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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) can account for as much as 26 percent 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 on understanding the behavior of the yield curve.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9529.

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Date of creation: Mar 2003
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Publication status: published as Brandt, Michael W. and Kenneth A. Kavajecz. "Price Discovery In The U.S. Treasury Market: The Impact Of Orderflow And Liquidity On The Yield Curve," Journal of Finance, 2004, v59(6,Dec), 2623-2654.
Handle: RePEc:nbr:nberwo:9529

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G0 - Financial Economics - - General

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  1. Chris D'Souza & Charles Gaa & Jing Yang, 2003. "An Empirical Analysis of Liquidity and Order Flow in the Brokered Interdealer Market for Government of Canada Bonds," Working Papers 03-28, Bank of Canada. [Downloadable!]
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