IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/827.html
   My bibliography  Save this paper

The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data

Author

Abstract

This paper uses order book and transactions data from the U.S. Treasury securities market to calculate daily liquidity measures for a thirty-year sample period (1991–2021). We then construct a daily index of liquidity from bid-ask spreads, quoted depth, and price impact, reflecting the fact that the varying measures capture different aspects of market liquidity. The index is highly correlated with liquidity proxies proposed in the literature, but is more sensitive to short-term drivers of liquidity, suggesting that it better measures contemporaneous liquidity (as opposed to expected future liquidity). In March 2020, in particular, the index peaks at a level commensurate with that seen during the 2007–09 global financial crisis, whereas the liquidity proxies peak at much lower levels. Significant drivers of market liquidity include announcements, implied volatility, and the extent to which high-frequency traders are present in the market.

Suggested Citation

  • Tobias Adrian & Michael J. Fleming & Erik Vogt, 2017. "The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data," Staff Reports 827, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:827
    Note: Revised January 2023. Previous title: “An index of Treasury Market liquidity: 1991-2017”
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr827.pdf
    File Function: Full text
    Download Restriction: no
    File URL: https://www.newyorkfed.org/research/staff_reports/sr827.html
    File Function: Summary
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Tobias Adrian & Richard K. Crump & Erik Vogt, 2019. "Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds," Journal of Finance, American Finance Association, vol. 74(4), pages 1931-1973, August.
    3. Erik Vogt & Michael Fleming & Or Shachar & Tobias Adrian, 2017. "Market Liquidity After the Financial Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 43-83, November.
    4. Goyenko, Ruslan & Subrahmanyam, Avanidhar & Ukhov, Andrey, 2011. "The Term Structure of Bond Market Liquidity and Its Implications for Expected Bond Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 111-139, February.
    5. Duffee, Gregory R, 1996. "Idiosyncratic Variation of Treasury Bill Yields," Journal of Finance, American Finance Association, vol. 51(2), pages 527-551, June.
    6. Grace Xing Hu & Jun Pan & Jiang Wang, 2013. "Noise as Information for Illiquidity," Journal of Finance, American Finance Association, vol. 68(6), pages 2341-2382, December.
    7. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    8. Goyenko, Ruslan Y. & Ukhov, Andrey D., 2009. "Stock and Bond Market Liquidity: A Long-Run Empirical Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(1), pages 189-212, February.
    9. Paolo Pasquariello & Clara Vega, 2007. "Informed and Strategic Order Flow in the Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 20(6), pages 1975-2019, November.
    10. Michael J. Fleming, 2000. "The benchmark U.S. Treasury market: recent performance and possible alternatives," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 129-145.
    11. Boni, Leslie & Leach, Chris, 2004. "Expandable limit order markets," Journal of Financial Markets, Elsevier, vol. 7(2), pages 145-185, February.
    12. Francis A. Longstaff, 2004. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices," The Journal of Business, University of Chicago Press, vol. 77(3), pages 511-526, July.
    13. Mardi Dungey & Olan Henry & Michael Mckenzie, 2013. "Modeling trade duration in U.S. Treasury markets," Quantitative Finance, Taylor & Francis Journals, vol. 13(9), pages 1431-1442, September.
    14. repec:bla:jfinan:v:59:y:2004:i:6:p:2623-2654 is not listed on IDEAS
    15. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Making the Treasury Market Resilient
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2020-08-19 11:50:39

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Han, Gaofeng & Miao, Hui & Wang, Yabin, 2020. "Liquidity of China’s Government Bond Market: Measures and Driving Forces," MPRA Paper 104545, University Library of Munich, Germany.
    2. Broto, Carmen & Lamas, Matías, 2020. "Is market liquidity less resilient after the financial crisis? Evidence for US Treasuries," Economic Modelling, Elsevier, vol. 93(C), pages 217-229.
    3. Livingston, Miles & Wu, Yanbin & Zhou, Lei, 2019. "The decline in idiosyncratic values of US Treasury securities," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    4. Daniel Borup & Jonas N. Eriksen & Mads M. Kjær & Martin Thyrsgaard, 2024. "Predicting Bond Return Predictability," Management Science, INFORMS, vol. 70(2), pages 931-951, February.
    5. Geromichalos, Athanasios & Jung, Kuk Mo & Lee, Seungduck & Carlos, Dillon, 2021. "A model of endogenous direct and indirect asset liquidity," European Economic Review, Elsevier, vol. 132(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Darrell Duffie & Michael Fleming & Frank Keane & Claire Nelson & Or Shachar & Peter Van Tassel, 2023. "Dealer capacity and US Treasury market functionality," BIS Working Papers 1138, Bank for International Settlements.
    2. K. Lebedeva, 2015. "An Empirical Analysis of the Russian Financial Markets’ Liquidity and Returns," Review of Business and Economics Studies // Review of Business and Economics Studies, Финансовый Университет // Financial University, vol. 3(3), pages 5-31.
    3. Lieven Baele & Geert Bekaert & Koen Inghelbrecht & Min Wei, 2020. "Flights to Safety," The Review of Financial Studies, Society for Financial Studies, vol. 33(2), pages 689-746.
    4. Díaz, Antonio & Escribano, Ana, 2017. "Liquidity measures throughout the lifetime of the U.S. Treasury bond," Journal of Financial Markets, Elsevier, vol. 33(C), pages 42-74.
    5. Schuster, Philipp & Uhrig-Homburg, Marliese, 2015. "Limits to arbitrage and the term structure of bond illiquidity premiums," Journal of Banking & Finance, Elsevier, vol. 57(C), pages 143-159.
    6. Challe, Edouard & Le Grand, François & Ragot, Xavier, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2483-2519.
    7. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    8. Michael J Fleming & Giang Nguyen, 2019. "Price and Size Discovery in Financial Markets: Evidence from the U.S. Treasury Securities Market," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 9(2), pages 256-295.
    9. Valentin Haddad & Alan Moreira & Tyler Muir, 2021. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response [Funding value adjustments]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5309-5351.
    10. Lewis, Kurt F. & Longstaff, Francis A. & Petrasek, Lubomir, 2021. "Asset mispricing," Journal of Financial Economics, Elsevier, vol. 141(3), pages 981-1006.
    11. Schneider, Michael & Lillo, Fabrizio & Pelizzon, Loriana, 2016. "How has sovereign bond market liquidity changed? An illiquidity spillover analysis," SAFE Working Paper Series 151, Leibniz Institute for Financial Research SAFE.
    12. Thomas M. Eisenbach & Gregory Phelan, 2022. "Fragility of Safe Asset Markets," Staff Reports 1026, Federal Reserve Bank of New York.
    13. Erik Vogt & Michael Fleming & Or Shachar & Tobias Adrian, 2017. "Market Liquidity After the Financial Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 9(1), pages 43-83, November.
    14. Pelizzon, Loriana & Subrahmanyam, Marti G. & Tomio, Davide & Uno, Jun, 2016. "Sovereign credit risk, liquidity, and European Central Bank intervention: Deus ex machina?," Journal of Financial Economics, Elsevier, vol. 122(1), pages 86-115.
    15. Fleming, Michael J. & Mizrach, Bruce & Nguyen, Giang, 2018. "The microstructure of a U.S. Treasury ECN: The BrokerTec platform," Journal of Financial Markets, Elsevier, vol. 40(C), pages 2-22.
    16. Kees E. Bouwman & Elvira Sojli & Wing Wah Tham, 2012. "Aggregate Stock Market Illiquidity and Bond Risk Premia," Tinbergen Institute Discussion Papers 12-140/IV/DSF46, Tinbergen Institute.
    17. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2017. "International Illiquidity," International Finance Discussion Papers 1201, Board of Governors of the Federal Reserve System (U.S.).
    18. Stefan Fiesel & Marliese Uhrig-Homburg, 2016. "Illiquidity Transmission in a Three-Country Framework: A Conditional Approach," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 17(3), pages 261-284, December.
    19. Driessen, Joost & Nijman, Theodore E. & Simon, Zorka, 2022. "A simple approach to estimate long-term interest rates," SAFE Working Paper Series 238, Leibniz Institute for Financial Research SAFE, revised 2022.
    20. Valentin Haddad & Alan Moreira & Tyler Muir, 2020. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response," NBER Working Papers 27168, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Treasury securities; market liquidity; index; low latency; electronification;
    All these keywords.

    JEL classification:

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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:827. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.