Trading Activity and Price Transparency in the Inflation Swap Market

13 Pages Posted: 11 Sep 2013

See all articles by Michael J. Fleming

Michael J. Fleming

Federal Reserve Bank of New York

John Sporn

Federal Reserve Bank of New York

Date Written: May 1, 2013

Abstract

The issues of liquidity and price transparency in derivatives markets have taken on greater import given regulatory efforts under way to improve their transparency. To date, the lack of transaction data has impeded the understanding of how the inflation swap and other derivatives markets operate. This article broadens that understanding by using a novel transaction data set to examine trading activity and price transparency in the quickly growing U.S. inflation swap market. The authors find that the market appears reasonably liquid and transparent, despite its over-the-counter nature and modest level of trading activity. Specifically, they find that transaction prices are typically quite close to widely available end-of-day quoted prices and that realized bid-ask spreads are modest, even though the reasonably comprehensive data set from 2010 contains just over two trades per day on average. The authors also identify concentrations of activity in certain tenors (ten years) and trade sizes ($25 million) and among certain market participants, as well as various attributes that help explain trade sizes and price deviations. Their study can serve as a resource for policymakers considering public reporting and other regulatory initiatives and for market participants and observers more generally interested in the workings of the inflation swap market.

Keywords: inflation swap, trading activity, liquidity, price transparency, inflation expectations

JEL Classification: G12, G13, G18

Suggested Citation

Fleming, Michael J. and Sporn, John, Trading Activity and Price Transparency in the Inflation Swap Market (May 1, 2013). Economic Policy Review, Vol. 19, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=2324235 or http://dx.doi.org/10.2139/ssrn.2324235

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/

John Sporn

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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