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Anticipated and Repeated Shocks in Liquid Markets

  • Hongjun Yan

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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File URL: http://icfpub.som.yale.edu/publications/2675
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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2675.

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Date of creation: 01 Mar 2011
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Handle: RePEc:ysm:somwrk:amz2675
Contact details of provider: Web page: http://icf.som.yale.edu/

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