Anticipated and Repeated Shocks in Liquid Markets

Dong Lou, Hongjun Yan and Jinfan Zhang

The Review of Financial Studies, 2013, vol. 26, issue 8, 1891-1912

Abstract: We show that Treasury security prices in the secondary market decrease significantly in the few days before Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. These results are linked to dealers' limited risk-bearing capacity and end-investors' imperfect capital mobility, highlighting the important role of frictions even in very liquid financial markets. Our results imply a hidden issuance cost to the U.S. Department of the Treasury, estimated to be 9 to 18 bps of the auction size, or over half a billion dollars for the issuance size in 2007. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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Working Paper: Anticipated and Repeated Shocks in Liquid Markets (2011)
Working Paper: Anticipated and Repeated Shocks in Liquid Markets (2011)
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