Price Discovery in a Market Under Stress: The U.S. Treasury Market in Fall 1998
49 Pages Posted: 6 Aug 2003
Date Written: 2005
Abstract
We analyze how price discovery in the inter-dealer market for U.S. Treasury securities differs during stressful times from normal periods. We distinguish between three forms of stress: intense trading activity, asymmetric depth and market maker risk aversion. Using tick-by-tick data on inter-dealer transactions in the on-the-run two-year, five-year and 10-year Treasury notes, we find that market stress has the following effects. First, during intraday periods of intense trading activity, the effect of signed trades on price movements becomes stronger. Second, trades in the direction of shallower depth become more important for price movements. Finally, the effect of signed trades on prices tends to become significantly stronger on stressful days, over and above the effects of intense trading and asymmetric depth.
Keywords: price discovery, liquidity, depth, market makers, treasury
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