The Term Structure of Bond Market Liquidity

39 Pages Posted: 3 Mar 2008

See all articles by Ruslan Goyenko

Ruslan Goyenko

McGill University - Desautels Faculty of Management

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Andrey Ukhov

Cornell University

Date Written: March 19, 2008

Abstract

Previous studies of Treasury market illiquidity span short time-periods and focus on particular maturities. In contrast, we study the joint time-series of illiquidity for different maturities over an extended time sample. We also compare time series determinants of on-the-run and off-the-run illiquidity. Illiquidity increases and the difference between spreads of long- and short-term bonds significantly widens during recessions, suggesting a "flight to liquidity" phenomenon wherein investors shift into the more liquid short-term bonds during economic contractions. We also document that macroeconomic variables such as inflation and federal fund rates forecast off-the-run illiquidity significantly but have only modest forecasting ability for on-the-run illiquidity. Bond returns across all maturities are forecastable by off-the-run short-term illiquidity but not by illiquidity of other maturities or by on-the-run bond illiquidity. Thus, short-term off-the-run liquidity, by reflecting macro shocks first, is the primary source of the liquidity premium in the Treasury bond market.

Suggested Citation

Goyenko, Ruslan and Subrahmanyam, Avanidhar and Ukhov, Andrey, The Term Structure of Bond Market Liquidity (March 19, 2008). EFA 2008 Athens Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1006234 or http://dx.doi.org/10.2139/ssrn.1006234

Ruslan Goyenko (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Andrey Ukhov

Cornell University ( email )

Ithaca, NY 14853
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
610
Abstract Views
2,230
rank
45,413
PlumX Metrics