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Anticipated and Repeated Shocks in Liquid Markets

  • Jinfan Zhang

    (Yale School of Management)

  • Hongjun Yan

    (Yale University)

  • Dong Lou

    (Loudon School of Economics)

We show that Treasury security prices in the secondary market decrease significantly before auctions and recover shortly after. Hence, Treasury security prices tend to be lower on auction days, implying a large issuance cost for the Treasury Department, which is estimated to be 9-18 basis points of the auction size (amounts to over half a billion dollars for issuing Treasury notes in 2007). These results appear to be consistent with the hypothesis of dealers’ limited risk-bearing capacity and the imperfect capital mobility of Treasury investors, highlighting the important role of capital mobility even in the most liquid financial markets.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1446.

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Date of creation: 2011
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Handle: RePEc:red:sed011:1446
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