Anticipated and Repeated Shocks in Liquid Markets

Jinfan Zhang, Hongjun Yan and Dong Lou
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Dong Lou: Loudon School of Economics

No 1446, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We show that Treasury security prices in the secondary market decrease significantly before auctions and recover shortly after. Hence, Treasury security prices tend to be lower on auction days, implying a large issuance cost for the Treasury Department, which is estimated to be 9-18 basis points of the auction size (amounts to over half a billion dollars for issuing Treasury notes in 2007). These results appear to be consistent with the hypothesis of dealers’ limited risk-bearing capacity and the imperfect capital mobility of Treasury investors, highlighting the important role of capital mobility even in the most liquid financial markets.

Date: 2011
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Related works:
Journal Article: Anticipated and Repeated Shocks in Liquid Markets (2013)
Working Paper: Anticipated and Repeated Shocks in Liquid Markets (2011)
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