IDEAS home Printed from https://ideas.repec.org/a/fip/fednep/y2003isepp83-108nv.9no.3.html
   My bibliography  Save this article

Measuring treasury market liquidity

Author

Listed:
  • Michael J. Fleming

Abstract

This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. Securities liquidity is important to those who transact in markets, those who monitor market conditions, and those who analyze market developments. This article estimates and evaluates a comprehensive set of liquidity measures for the U.S. Treasury securities market. The author finds that the commonly used bid-ask spread-the difference between bid and offer prices-is a useful measure for assessing and tracking liquidity. The spread is highly correlated with a more sophisticated price impact measure and is correlated with episodes of reported poor liquidity in the expected manner. He also finds that other measures correlate less strongly with episodes of poor liquidity and with the bid-ask spread and price impact measures, indicating that they are only modest proxies for market liquidity. Trading volume and trading frequency, in particular, are found to be weak proxies for market liquidity, as both high and low levels of trading activity are associated with periods of poor liquidity.

Suggested Citation

  • Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
  • Handle: RePEc:fip:fednep:y:2003:i:sep:p:83-108:n:v.9no.3
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/epr/03v09n3/0309flem.html
    Download Restriction: no

    File URL: https://www.newyorkfed.org/medialibrary/media/research/epr/03v09n3/0309flem.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Martin D.D. Evans & Richard K. Lyons, 2017. "Order Flow and Exchange Rate Dynamics," World Scientific Book Chapters,in: Studies in Foreign Exchange Economics, chapter 6, pages 247-290 World Scientific Publishing Co. Pte. Ltd..
    2. Martin D. D. Evans(Georgetown University and NBER), 2005. "What are the Origins of Foreign Exchange Movements?," Working Papers gueconwpa~05-05-06, Georgetown University, Department of Economics.
    3. Tarun Chordia, 2001. "Market Liquidity and Trading Activity," Journal of Finance, American Finance Association, vol. 56(2), pages 501-530, April.
    4. Robert F. Engle & Joe Lange, 1997. "Measuring, Forecasting and Explaining Time Varying Liquidity in the Stock Market," NBER Working Papers 6129, National Bureau of Economic Research, Inc.
    5. Huberman, G. & Halka, D., 1999. "Systematic Liquidity," Papers 99-9, Columbia - Graduate School of Business.
    6. Payne, Richard, 2003. "Informed trade in spot foreign exchange markets: an empirical investigation," Journal of International Economics, Elsevier, vol. 61(2), pages 307-329, December.
    7. Huang, Roger D. & Cai, Jun & Wang, Xiaozu, 2002. "Information-Based Trading in the Treasury Note Interdealer Broker Market," Journal of Financial Intermediation, Elsevier, vol. 11(3), pages 269-296, July.
    8. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 31-50.
    9. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-651.
    10. Dominique Dupont & Brian P. Sack, 1999. "The Treasury securities market: overview and recent development," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 785-806.
    11. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(01), pages 109-126, March.
    12. Paul Bennett & Kenneth Barbade & John Kambhu, 2000. "Enhancing the liquidity of U.S. Treasury securities in an era of surpluses," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 89-119.
    13. Kamara, Avraham, 1994. "Liquidity, Taxes, and Short-Term Treasury Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(03), pages 403-417, September.
    14. Sarig, Oded & Warga, Arthur, 1989. "Bond Price Data and Bond Market Liquidity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 367-378, September.
    15. Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1996. "Economic News and the Yield Curve: Evidence From the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 96-13, New York University, Leonard N. Stern School of Business-.
    16. Tarun Chordia & Asani Sarkar & Avanidhar Subrahmanyam, 2003. "An empirical analysis of stock and bond market liquidity," Staff Reports 164, Federal Reserve Bank of New York.
    17. repec:bis:bisqtr:0206e is not listed on IDEAS
    18. Paul Bennett & Kenneth Garbade & John Kambhu, 1999. "Enhancing the Liquidity of U.S. Treasury Securities in an Era of Surpluses," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-083, New York University, Leonard N. Stern School of Business-.
    19. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    20. Edwin J. Elton & T. Clifton Green, 1998. "Tax and Liquidity Effects in Pricing Government Bonds," Journal of Finance, American Finance Association, vol. 53(5), pages 1533-1562, October.
    21. Chordia, Tarun & Roll, Richard & Subrahmanyam, Avanidhar, 2000. "Commonality in liquidity," Journal of Financial Economics, Elsevier, vol. 56(1), pages 3-28, April.
    22. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
    23. Michael J. Fleming, 1997. "The round-the-clock market for U.S. Treasury securities," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 9-32.
    24. Vincent Reinhart & Brian Sack, 2002. "The changing information content of market interest rates," BIS Papers chapters,in: Bank for International Settlements (ed.), Market functioning and central bank policy, volume 12, pages 340-357 Bank for International Settlements.
    25. Goodhart, Charles A. E. & O'Hara, Maureen, 1997. "High frequency data in financial markets: Issues and applications," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 73-114, June.
    26. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
    27. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    28. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Multiproduct Firms, Product Differentiation, and Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
    29. Tanner, J Ernest & Kochin, Levis A, 1971. "The Determinants of the Difference Between Bid and Ask Prices on Government Bonds," The Journal of Business, University of Chicago Press, vol. 44(4), pages 375-379, October.
    30. Hasbrouck, Joel & Seppi, Duane J., 2001. "Common factors in prices, order flows, and liquidity," Journal of Financial Economics, Elsevier, vol. 59(3), pages 383-411, March.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednep:y:2003:i:sep:p:83-108:n:v.9no.3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Farber). General contact details of provider: http://edirc.repec.org/data/frbnyus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.