TY - JOUR
T1 - Liquidity and volatility in the U.S. Treasury market
AU - Nguyen, Giang
AU - Engle, Robert
AU - Fleming, Michael
AU - Ghysels, Eric
N1 - Funding Information:
The paper was previously circulated under the title ?Liquidity, Volatility, and Flights to Safety in the U.S. Treasury Market: Evidence from a New Class of Dynamic Order Book Models?. The authors benefited greatly from discussions with Michael Aguilar, Saraswata Chaudhuri, Wayne Ferson, Corey Garriott, Nikolaus Hautsch, Jean Helwege, Jonathan Hill, Pete Kyle, Albert Menkveld, Adam Reed, and Duane Seppi. The authors also thank Brian Gibbons, Casidhe Horan, Collin Jones, Neel Krishnan, Weiling Liu, Francisco Ruela, and Ron Yang for excellent research assistance. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.
Publisher Copyright:
© 2019 Elsevier B.V.
PY - 2020/8
Y1 - 2020/8
N2 - 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 and 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.
AB - 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 and 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.
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U2 - 10.1016/j.jeconom.2019.12.002
DO - 10.1016/j.jeconom.2019.12.002
M3 - Article
AN - SCOPUS:85077551433
VL - 217
SP - 207
EP - 229
JO - Journal of Econometrics
JF - Journal of Econometrics
SN - 0304-4076
IS - 2
ER -