Anticipated and Repeated Shocks in Liquid Markets
London School of Economics & Political Science (LSE)
Rutgers, The State University of New Jersey - Rutgers Business School
Yale University - International Center for Finance
May 2, 2013
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
Date posted: August 15, 2010 ; Last revised: May 3, 2013
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