Premium
Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve
Author(s) -
BRANDT MICHAEL W.,
KAVAJECZ KENNETH A.
Publication year - 2004
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/j.1540-6261.2004.00711.x
Subject(s) - treasury , market liquidity , yield curve , economics , yield (engineering) , price discovery , monetary economics , liquidity premium , econometrics , liquidity crisis , financial economics , interest rate , geography , materials science , archaeology , metallurgy , futures contract
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) account for up to 26% 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 in understanding the behavior of the yield curve.