Abstract

http://ssrn.com/abstract=1659239
 
 

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Anticipated and Repeated Shocks in Liquid Markets


Dong Lou


London School of Economics & Political Science (LSE)

Hongjun Yan


Yale University - International Center for Finance

Jinfan Zhang


Yale University - International Center for Finance

May 2, 2013


Abstract:     
This paper examines how anticipated and frequently repeated shocks are absorbed in liquid financial markets. We show that Treasury security prices in the secondary market decrease significantly in the few days leading up to Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. The issuance cost to the Treasury Department is estimated to be between 9 and 18 basis points of the auction size, or over half a billion dollars for note issuance alone in 2007, most of which can be attributed to the price pressure effect around auction days. These results are linked to dealers’ limited risk-bearing capacity and the imperfect capital mobility of end-investors, highlighting the important role of market frictions even in very liquid financial markets.

Number of Pages in PDF File: 38

Keywords: Liquidity, Capital mobility, Supply shocks, Treasury auctions

JEL Classification: G12

working papers series


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Date posted: August 15, 2010 ; Last revised: May 3, 2013

Suggested Citation

Lou, Dong and Yan, Hongjun and Zhang, Jinfan, Anticipated and Repeated Shocks in Liquid Markets (May 2, 2013). Available at SSRN: http://ssrn.com/abstract=1659239 or http://dx.doi.org/10.2139/ssrn.1659239

Contact Information

Dong Lou
London School of Economics & Political Science (LSE) ( email )
Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)
HOME PAGE: http://personal.lse.ac.uk/loud/
Hongjun Yan (Contact Author)
Yale University - International Center for Finance ( email )
Box 208200
New Haven, CT 06520
United States
HOME PAGE: http://faculty.som.yale.edu/hongjunyan/

Jinfan Zhang
Yale University - International Center for Finance ( email )
Box 208200
New Haven, CT 06520
United States
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