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Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information
Author(s) -
Fleming Michael J.,
Remolona Eli M.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00172
Subject(s) - market liquidity , treasury , price formation , monetary economics , economics , volatility (finance) , public information , order (exchange) , financial economics , algorithmic trading , mid price , business , price level , finance , archaeology , public administration , political science , history
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.