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Anticipated and Repeated Shocks in Liquid Markets

Author

Listed:
  • Jinfan Zhang

    (Yale School of Management)

  • Hongjun Yan

    (Yale University)

  • Dong Lou

    (Loudon School of Economics)

Abstract

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.

Suggested Citation

  • Jinfan Zhang & Hongjun Yan & Dong Lou, 2011. "Anticipated and Repeated Shocks in Liquid Markets," 2011 Meeting Papers 1446, Society for Economic Dynamics.
    • Handle: RePEc:red:sed011:1446
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    References listed on IDEAS

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