Price Discovery in a Market Under Stress: The U.S. Treasury Market in Fall 1998

49 Pages Posted: 6 Aug 2003

See all articles by Craig Furfine

Craig Furfine

Kellogg School of Management - Department of Finance

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department

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

Suggested Citation

Furfine, Craig and Remolona, Eli M., Price Discovery in a Market Under Stress: The U.S. Treasury Market in Fall 1998 (2005). EFA 2003 Annual Conference Paper No. 558, FRB Chicago Working Paper No. 2005-06, Available at SSRN: https://ssrn.com/abstract=424921 or http://dx.doi.org/10.2139/ssrn.424921

Craig Furfine (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

Eli M. Remolona

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

IFC 2 Bldg, 78/F
Central
Hong Kong
Hong Kong
+852 2982 7150 (Phone)
+852 2982 7123 (Fax)

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