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

Michael Fleming and Eli Remolona

Journal of Finance, 1999, vol. 54, issue 5, 1901-1915

Abstract: 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.

Date: 1999
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