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Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve

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  • Michael W. Brandt
  • Kenneth A. Kavajecz

Abstract

We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) can account for as much as 26 percent of the day-to-day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity is low. All of the evidence points toward an important role of price discovery on understanding the behavior of the yield curve.

Suggested Citation

  • Michael W. Brandt & Kenneth A. Kavajecz, 2003. "Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve," NBER Working Papers 9529, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9529
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    Cited by:

    1. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
    2. Sun, Zhuowei & Dunne, Peter G. & Li, Youwei, 2015. "Price discovery in the dual-platform US Treasury market," Global Finance Journal, Elsevier, vol. 28(C), pages 95-110.
    3. repec:bla:jfinan:v:59:y:2004:i:3:p:1201-1234 is not listed on IDEAS
    4. Chris D'Souza & Charles Gaa & Jing Yang, 2003. "An Empirical Analysis of Liquidity and Order Flow in the Brokered Interdealer Market for Government of Canada Bonds," Staff Working Papers 03-28, Bank of Canada.

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    • G0 - Financial Economics - - General

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