Liquidity and Volatility in the U.S. Treasury Market

55 Pages Posted: 2 Jan 2013 Last revised: 14 Nov 2018

See all articles by Giang Nguyen

Giang Nguyen

Pennsylvania State University - Smeal College of Business

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Michael J. Fleming

Federal Reserve Bank of New York

Eric Ghysels

University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Date Written: November 5, 2018

Abstract

We model the joint dynamics of intraday liquidity, volume, and volatility in the U.S. Treasury market, especially through the 2007--09 financial crisis and around important economic announcements. Using various specifications based on Bauwens & Giot (2000)'s Log-ACD(1,1) model, we find that liquidity, volume and volatility are highly persistent, with volatility having a lower short-term persistence than the other two. Market liquidity and volume are important to explaining volatility dynamics but not vice versa. In addition, market dynamics change during the financial crisis, with all variables exhibiting increased responsiveness to their most recent realizations. Our models also reveal different market dynamics around announcements. Finally, we introduce new measures of liquidity risk that are useful for continually monitoring liquidity conditions and the risk of liquidity stress in the market.

Keywords: liquidity, Treasury market, limit order book, financial crisis, volatility, announcement

JEL Classification: C58, G01, G12

Suggested Citation

Nguyen, Giang and Engle, Robert F. and Fleming, Michael J. and Ghysels, Eric, Liquidity and Volatility in the U.S. Treasury Market (November 5, 2018). Journal of Econometrics, Forthcoming; FRB of New York Staff Report No. 590; UNC Kenan-Flagler Research Paper No. 2013-20. Available at SSRN: https://ssrn.com/abstract=2195655 or http://dx.doi.org/10.2139/ssrn.2195655

Giang Nguyen

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802
United States

HOME PAGE: http://directory.smeal.psu.edu/gxn13

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6372 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

Eric Ghysels

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )

Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)

HOME PAGE: http://www.unc.edu/~eghysels/

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