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Market-making costs in Treasury bills: A benchmark for the cost of liquidity

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  • Griffiths, Mark D.
  • Lindley, James T.
  • Winters, Drew B.

Abstract

We focus on market-making costs by examining the daily bid-ask spreads for off-the-run, one-month Treasury bills around two liquidity-changing events. Event one, Salomon Brothers' supply shock, results in a roughly 2.5-basis-point increase in the spread because of an increase in ask prices; and event two, the Long-Term Capital Management demand shock, results in a doubling of the spread because of a decrease in bid prices. Our results provide a benchmark for researchers examining bid-ask spreads of securities that include a liquidity premium, a risk premium, and an asymmetric information premium.

Suggested Citation

  • Griffiths, Mark D. & Lindley, James T. & Winters, Drew B., 2010. "Market-making costs in Treasury bills: A benchmark for the cost of liquidity," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2146-2157, September.
    • Handle: RePEc:eee:jbfina:v:34:y:2010:i:9:p:2146-2157
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