Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information

  • Author(s): Michael J. Fleming, Eli M. Remolona
  • Published: Dec 17, 2002
  • Pages: 1901-1915
  • DOI: 10.1111/0022-1082.00172

The arrival of public information in the U.S. Treasury market sets off a two‐stage adjustment process for prices, trading volume, and bid‐ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.

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