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Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve

  • Michael W. Brandt
  • Kenneth A. Kavajecz
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    We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) can account for as much as 26 percent of the day-to-day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity is low. All of the evidence points toward an important role of price discovery on understanding the behavior of the yield curve.

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    File URL: http://www.nber.org/papers/w9529.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9529.

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    Date of creation: Mar 2003
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    Publication status: published as Brandt, Michael W. and Kenneth A. Kavajecz. "Price Discovery In The U.S. Treasury Market: The Impact Of Orderflow And Liquidity On The Yield Curve," Journal of Finance, 2004, v59(6,Dec), 2623-2654.
    Handle: RePEc:nbr:nberwo:9529
    Note: AP ME
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. 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.
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