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Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information

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  • Michael J. Fleming

    (Federal Reserve Bank of New York,)

  • Eli M. Remolona

    (Bank for International Settlements and the Federal Reserve Bank of New York)

Abstract

The arrival of public information in the U.S. Treasury market sets off a two-stage adjustment process for prices, trading volume, and bid-ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views. Copyright The American Finance Association 1999.

Suggested Citation

  • 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.
  • Handle: RePEc:bla:jfinan:v:54:y:1999:i:5:p:1901-1915
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