Measuring treasury market liquidity

Abstract: This paper examines a comprehensive set of liquidity measures for the U.S. Treasury market. The measures are analyzed relative to one another, across securities, and over time. I find highly significant price impact coefficients, such that a simple model that explains price changes with net order flow produces an R statistic above 30 percent for the two-year note. The price impact coefficients are highly correlated with bid-ask spreads and with episodes of reported poor liquidity (such as the fall 1998 financial markets turmoil). Quote and trade sizes correlate modestly with these episodes and with the other liquidity measures, as do yield spreads between on-the-run and off-the-run securities. In contrast, trading volume and trading frequency are only weakly correlated with these other measures, suggesting that they are poor liquidity proxies. The various measures are positively correlated across securities, almost without exception, especially for Treasury notes.

Keywords: Bid-ask spreads; Trading volume; Quote sizes; Price impact; Liquidity;

JEL Classification: G14;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2001

Number: 133

Pages: 57 pages

Note: For a published version of this report, see Michael J. Fleming, "Measuring Treasury Market Liquidity," Federal Reserve Bank of New York Economic Policy Review 9, no.3 (September 2003): 83-108. An earlier version of this paper is titled “Treasury Market Liquidity.”