Short horizon liquidity and trading activity in the US Treasury market: do inventory holding costs matter?

Kenneth Khang and Tao-Hsien Dolly King

Applied Financial Economics, 2010, vol. 20, issue 14, 1085-1098

Abstract: We examine the short horizon relation between liquidity and trading activity in the US Treasury market during nonannouncement periods at 5-, 10- and 30-minute intervals. Our results provide an interesting contrast to the findings of Lee et al. (1993), who examine this relation for the New York Stock Exchange (NYSE). Similar to the NYSE, we find that market-makers adjust both spread and depth simultaneously in managing their inventory positions. However, in contrast to the NYSE, we find a positive, not negative, relation between trading activity and liquidity after controlling for adverse selection. These results are robust to whether we measure trading activity with volume or number of trades and whether we measure liquidity using bid-ask spread or depth.

Date: 2010
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DOI: 10.1080/09603101003761861

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