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Anticipated and Repeated Shocks in Liquid Markets

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  • Jinfan Zhang

    (Yale School of Management)

  • Hongjun Yan

    (Yale University)

  • Dong Lou

    (Loudon School of Economics)

Abstract

We show that Treasury security prices in the secondary market decrease significantly before auctions and recover shortly after. Hence, Treasury security prices tend to be lower on auction days, implying a large issuance cost for the Treasury Department, which is estimated to be 9-18 basis points of the auction size (amounts to over half a billion dollars for issuing Treasury notes in 2007). These results appear to be consistent with the hypothesis of dealers’ limited risk-bearing capacity and the imperfect capital mobility of Treasury investors, highlighting the important role of capital mobility even in the most liquid financial markets.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1446.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1446

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Cited by:
  1. Jennie Bai & Michael Fleming & Casidhe Horan, 2013. "The microstructure of China's government bond market," Staff Reports 622, Federal Reserve Bank of New York.
  2. D'Amico, Stefania & Fan, Roger & Kitzul, Yuriy, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.
  3. Kandrac, John & Schlusche, Bernd, 2013. "Flow effects of large-scale asset purchases," Economics Letters, Elsevier, vol. 121(2), pages 330-335.
  4. Catherine L. Mann & Oren Klachkin, 2011. "U.S. Treasury Auction Yields During Boom, Bust, and Quantitative Easing: Role for Fed and Foreign Purchasers," Working Papers 47, Brandeis University, Department of Economics and International Businesss School, revised May 2012.

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