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The Effect of Transaction Size on Off-the-Run Treasury Prices

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  • David F. Babbel
  • Craig B. Merrill
  • Mark F. Meyer
  • Meiring de Villiers

Abstract

A price pressure effect is implied by segmentation in the market for a security. An empirical property of a segmented market is that the price of the security is sensitive to supply and demand conditions for that specific security, absent changes in risk and absent any new information. This paper examines intra-day trading data from the inter-dealer broker market for U.S. Treasury securities and finds that there is a price pressure effect in the off-the-run Treasury market. Thus, securities that would appear to be very close substitutes, i.e., on-the-run and off-the-run Treasury bonds, behave as if there is some degree of market segmentation. There have been several studies of price pressure in the equity market and Treasury bill market but this is the first study of the off-the-run Treasury note and bond market to investigate a price pressure effect using intra-day data. It is also the first study to analyze price pressure through matched pairs of securities that differ only in liquidity and with high frequency data.

Suggested Citation

  • David F. Babbel & Craig B. Merrill & Mark F. Meyer & Meiring de Villiers, 2001. "The Effect of Transaction Size on Off-the-Run Treasury Prices," Center for Financial Institutions Working Papers 01-03, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:01-03
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    File URL: http://fic.wharton.upenn.edu/fic/papers/01/0103.pdf
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    2. Georges Hübner & Robert Joliet, 2013. "Government Debt Denomination Policies Before and After the EMU Advent," Open Economies Review, Springer, vol. 24(2), pages 283-309, April.
    3. Merrill, Craig B. & Nadauld, Taylor D. & Stulz, René M. & Sherlun, Shane M., 2021. "Were there fire sales in the RMBS market?," Journal of Monetary Economics, Elsevier, vol. 122(C), pages 17-37.
    4. Chris D'Souza & Charles Gaa, 2004. "The Effects of Economic News on Bond Market Liquidity," Staff Working Papers 04-16, Bank of Canada.
    5. Longstaff, Francis A & Han, Bing & Merrill, Craig, 2004. "Revenue Implications of Multi-Item Multi-Unit Auction Designs: Empirical Evidence from the U.S. Treasury Buyback Auctions," University of California at Los Angeles, Anderson Graduate School of Management qt7344v866, Anderson Graduate School of Management, UCLA.
    6. 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.
    7. Brown, Alessio J. G. & Žarnić, Žiga, 2003. "Explaining the increased German credit spread: The role of supply factors," Kiel Advanced Studies Working Papers 412, Kiel Institute for the World Economy (IfW Kiel).
    8. De Santis, Roberto A. & Holm-Hadulla, Fédéric, 2017. "Flow effects of central bank asset purchases on euro area sovereign bond yields: evidence from a natural experiment," Working Paper Series 2052, European Central Bank.
    9. Seth Kopchak, 2014. "The absorption effect of US Treasury auctions," Review of Quantitative Finance and Accounting, Springer, vol. 43(1), pages 21-44, July.
    10. Han, Bing & Longstaff, Francis A. & Merrill, Craig, 2005. "The Cherry-Picking Option in the U.S. Treasury Buyback Auctions," Working Paper Series 2004-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    11. Helwege, Jean & Wang, Liying, 2021. "Liquidity and price pressure in the corporate bond market: evidence from mega-bonds," Journal of Financial Intermediation, Elsevier, vol. 48(C).

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