Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information

Authors

  • Michael J. Fleming,

    1. Federal Reserve Bank of New York
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  • Eli M. Remolona

    1. Bank for International Settlements, The Federal Reserve Bank of New York
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    • Fleming is at the Federal Reserve Bank of New York, and Remolona is at the Bank for International Settlements and the Federal Reserve Bank of New York. An earlier version of this paper is titled “Price Formation and Liquidity in the U.S. Treasury Market: Evidence from Intraday Patterns Around Announcements.” We have received helpful comments from Torben Andersen, Pierluigi Balduzzi, Jennifer Conrad, Louis Ederington, Young Ho Eom, Clifton Green, Joel Hasbrouck, Kose John, Charles Jones, Frank Keane, Chris Lamoureux, Bruce Lehmann, Peter Locke, Richard Lyons, Tony Rodrigues, Asani Sarkar, René Stulz (the editor), an anonymous referee, economists and traders at three primary dealers, and seminar participants at the Bank of Canada, the Time Series Analysis of High Frequency Financial Data Conference (1997), and the NBER Market Microstructure Conference (1997). Views expressed are the authors' and do not necessarily reflect those of the Bank for International Settlements, the Federal Reserve Bank of New York, or the Federal Reserve System.

Abstract

The arrival of public information in the U.S. Treasury market sets off a two-stage adjustment process for prices, trading volume, and bid-ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.

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