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Information Shocks, Liquidity Shocks, Jumps, and Price Discovery – Evidence from the U.S. Treasury Market

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Information Shocks, Liquidity Shocks, Jumps, and Price Discovery – Evidence from the U.S. Treasury Market Discussion by Clifton Green (Emory University) Better understand jumps in Treasury markets Look at influence of liquidity on jumps Jumps

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Information Shocks, Liquidity Shocks, Jumps, and Price Discovery – Evidence from the U.S. Treasury Market

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  1. Information Shocks, Liquidity Shocks, Jumps, and Price Discovery – Evidence from the U.S. Treasury Market Discussion by Clifton Green (Emory University) • Better understand jumps in Treasury markets • Look at influence of liquidity on jumps

  2. Jumps • Security returns are better explained with continuous processes that include jumps • Relevant for pricing and risk management • What horizon is relevant? • Replicating portfolio • What do practitioners say?

  3. Source of Jumps • “ A large price change occurs either when • A market order hits the existing limit orders following the announcement • New limit orders come in and set a new price moving the existing mid-quote up/down. “ • Is the data able to distinguish between these two causes of jumps? • Not just quotes but full limit order book • Public information vs. private information • For public information, active vs. passive changing of quotes

  4. News vs. No-News Jumps • Source of jump may be different between news and no-news jumps • Are no-news jumps informed trading or unanticipated news? • Do no-news jumps happen concurrently across bonds? • Perhaps extend the sample back to 2003 to get more observations • 10% of jumps are no-news

  5. Liquidity and Jumps • “Liquidity shocks in general precede jumps in bond prices and play an important role in bond price jumps” • Could selection bias play a role? • Reduction in liquidity could be random • For no-news jumps, examine depth at bid or ask (jump specific) • Liquidity vs. informed trading • Look for reversals over longer periods

  6. News vs. No News

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