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Anticipated and repeated shocks in liquid markets

Author

Listed:
  • Lou, Dong
  • Yan, Hongjun
  • Zhang, Jinfan

Abstract

We show that Treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after. This price pattern implies a large issuance cost for the Treasury Department, which is estimated to be between 9 and 18 basis points of the auction size. For example, this cost amounts to over half a billion dollars for issuing Treasury notes alone in 2007. Our results appear to be consistent with the hypothesis of primary dealers’ limited risk-bearing capacity and the imperfect capital mobility of end investors in the Treasury market (e.g., federal agencies, sovereign wealth funds, pension funds, and etc.), highlighting the important role of capital mobility even in the most liquid financial markets.

Suggested Citation

  • Lou, Dong & Yan, Hongjun & Zhang, Jinfan, 2011. "Anticipated and repeated shocks in liquid markets," LSE Research Online Documents on Economics 43120, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:43120
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    File URL: http://eprints.lse.ac.uk/43120/
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    Cited by:

    1. Catherine Mann & Oren Klachkin, 2015. "Has Quantitative Easing Affected the U.S. Treasury Auction Market?," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 135-146, March.
    2. Michael A.S. Joyce & Matthew Tong, 2012. "QE and the Gilt Market: a Disaggregated Analysis," Economic Journal, Royal Economic Society, vol. 122(564), pages 348-384, November.
    3. Jennie Bai & Michael J. Fleming & Casidhe Horan, 2013. "The Microstructure of China's Government Bond Market," Staff Reports 622, Federal Reserve Bank of New York.
    4. Jeffrey Gao & Francisco Rivadeneyra & Gabriel Rodriguez Rondon, 2018. "The Government of Canada Debt Securities Data Set," Technical Reports 112, Bank of Canada.

    More about this item

    Keywords

    liquidity; slow-moving capital; supply shocks; treasury auctions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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