Trading Liquidity and Funding Liquidity in Fixed Income Markets: Implications of Market Microstructure Invariance

Albert Kyle () and Anna Obizhaeva ()
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Albert Kyle: University of Maryland
Anna Obizhaeva: New Economic School

No w0271, Working Papers from New Economic School (NES)

Abstract: This essay applies market microstructure invariance to fixed income markets. An invariance-based illiquidity measure calibrated from stock market data is extrapolated to the markets for Treasury and corporate fixed income securities. By consistently incorporating both leverage neutrality, this illiquidity measure explains both trading liquidity and funding liquidity. Invariance predicts that Treasury markets are about 55 times more liquid than markets for individual corporate bonds and operate about 3,000 times more quickly. Invariance is used to discuss repo haircuts and the flash rally of October 15, 2014.

Keywords: market microstructure; liquidity; bid-ask spread; market impact; transaction costs; order size; invariance; fixed income; banking; systemic risk; repo markets (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-08
New Economics Papers: this item is included in nep-mst
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