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The on-the-run liquidity phenomenon

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  • Pasquariello, Paolo
  • Vega, Clara

Abstract

We test the implications of a model of multi-asset speculative trading in which liquidity differentials between on-the-run and off-the-run U.S. Treasury bonds ensue from endowment shocks in the presence of two realistic market frictions--information heterogeneity and imperfect competition among informed traders--and a public signal. Our evidence suggests that (i) off/on-the-run liquidity differentials are economically and statistically significant, even after controlling for several of the bonds' intrinsic characteristics (such as duration, convexity, repo rates, or term premiums), and (ii) off/on-the-run liquidity differentials are smaller immediately following bond auction dates, and larger when the uncertainty surrounding the ensuing auction allocations is high, when the dispersion of beliefs across informed traders is high, and when macroeconomic announcements are noisy, consistent with our model.

Suggested Citation

  • Pasquariello, Paolo & Vega, Clara, 2009. "The on-the-run liquidity phenomenon," Journal of Financial Economics, Elsevier, vol. 92(1), pages 1-24, April.
  • Handle: RePEc:eee:jfinec:v:92:y:2009:i:1:p:1-24
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    Cited by:

    1. Caporale, Guglielmo Maria & Girardi, Alessandro & Paesani, Paolo, 2012. "Quoted spreads and trade imbalance dynamics in the European Treasury bond market," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 173-182.
    2. Jeffrey Gao & Francisco Rivadeneyra & Gabriel Rodriguez Rondon, 2018. "The Government of Canada Debt Securities Data Set," Technical Reports 112, Bank of Canada.
    3. Catherine L. Mann & Oren Klachkin, 2014. "U.S. Treasury Auction Yields Before and During Quantitative Easing: Market Factors vs.Auction Specific Factors," Working Papers 67, Brandeis University, Department of Economics and International Businesss School.
    4. Jacob Boudoukh & Jordan Brooks & Matthew Richardson & Zhikai Xu, 2016. "The Complexity of Liquidity: The Extraordinary Case of Sovereign Bonds," NBER Working Papers 22576, National Bureau of Economic Research, Inc.
    5. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2012. "Flights to Safety," Working Paper Research 230, National Bank of Belgium.
    6. Alessandro Girardi & Claudio Impenna, 2013. "Price discovery in the Italian sovereign bonds market: the role of order flow," Temi di discussione (Economic working papers) 906, Bank of Italy, Economic Research and International Relations Area.
    7. Corradin, Stefano & Heider, Florian & Hoerova, Marie, 2017. "On collateral: implications for financial stability and monetary policy," Working Paper Series 2107, European Central Bank.
    8. Peter Hördahl & Eli M Remolona & Giorgio Valente, 2015. "Expectations and risk premia at 8:30am: Macroeconomic announcements and the yield curve," BIS Working Papers 527, Bank for International Settlements.
    9. repec:wsi:rpbfmp:v:20:y:2017:i:02:n:s0219091517500084 is not listed on IDEAS
    10. repec:eee:finsta:v:33:y:2017:i:c:p:297-310 is not listed on IDEAS
    11. Andrade, Sandro C. & Barrett, W. Brian, 2011. "Can broker-dealer client surveys provide signals for debt investing?," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1170-1178, May.
    12. repec:eee:finmar:v:33:y:2017:i:c:p:42-74 is not listed on IDEAS
    13. 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.
    14. Catherine Mann & Oren Klachkin, 2015. "Has Quantitative Easing Affected the U.S. Treasury Auction Market?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 135-146, March.
    15. Simona Delle Chiaie & Bernardo Maggi, 2014. "Italian Government debt liquidity, is it of value?," DSS Empirical Economics and Econometrics Working Papers Series 2014/3, Centre for Empirical Economics and Econometrics, Department of Statistics, "Sapienza" University of Rome.
    16. Narayan Bulusu & Sermin Gungor, 2018. "Government of Canada Securities in the Cash, Repo and Securities Lending Markets," Discussion Papers 18-4, Bank of Canada.
    17. repec:eee:empfin:v:44:y:2017:i:c:p:125-144 is not listed on IDEAS

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