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Market-making costs in Treasury bills: A benchmark for the cost of liquidity

  • Griffiths, Mark D.
  • Lindley, James T.
  • Winters, Drew B.
Registered author(s):

    We focus on market-making costs by examining the daily bid-ask spreads for off-the-run, one-month Treasury bills around two liquidity-changing events. Event one, Salomon Brothers' supply shock, results in a roughly 2.5-basis-point increase in the spread because of an increase in ask prices; and event two, the Long-Term Capital Management demand shock, results in a doubling of the spread because of a decrease in bid prices. Our results provide a benchmark for researchers examining bid-ask spreads of securities that include a liquidity premium, a risk premium, and an asymmetric information premium.

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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 9 (September)
    Pages: 2146-2157

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2146-2157
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. Fleming, Michael J, 2002. "Are Larger Treasury Issues More Liquid? Evidence from Bill Reopenings," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 707-35, August.
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    14. Duffee, Gregory R, 1996. " Idiosyncratic Variation of Treasury Bill Yields," Journal of Finance, American Finance Association, vol. 51(2), pages 527-51, June.
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