The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market

43 Pages Posted: 17 Jul 2003

See all articles by David Goldreich

David Goldreich

University of Toronto - Rotman School of Management

Bernd Hanke

London Business School - Institute of Finance and Accounting

Purnendu Nath

London Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 2003

Abstract

This Paper examines the price differences between very liquid on-the-run US Treasury securities and less liquid off-the-run securities over the entire on/off cycle. Unlike previous studies, by comparing pairs of securities as their relative liquidity varies over time, we can disregard any cross-sectional differences between the securities. Also, since the liquidity of Treasury notes varies predictably over time we are able to distinguish between current liquidity and expected future liquidity. We show that the more liquid security is priced higher on average, but that this difference depends on the amount of expected future liquidity over its remaining lifetime rather than its current liquidity. We measure future liquidity using both quotes and trades. The liquidity measures include bid-ask spread, depth and trading activity. Examining a variety of liquidity measures enables us to evaluate their relative importance and to identify the liquidity proxies that most affect prices. Although all the measures are highly correlated with one another, we find that quoted bid-ask spread and quoted depth are more important than effective spread and trade size, respectively. Among measures of market activity, however, the number of trades and volume are more related to the liquidity premium than the number of quotes.

Keywords: Liquidity, asset pricing

JEL Classification: G12, G14

Suggested Citation

Goldreich, David and Hanke, Bernt and Nath, Purnendu, The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market (May 2003). Available at SSRN: https://ssrn.com/abstract=420186

David Goldreich (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-0833 (Phone)

Bernt Hanke

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Purnendu Nath

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://phd.london.edu/pnath

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