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Discussion Paper
How Does the Liquidity of New Treasury Securities Evolve?
Fleming, Michael J. (2020-08-26)
In a recent Liberty Street Economics post, we showed that the newly reintroduced 20-year bond trades less than other on-the-run Treasury securities and has similar liquidity to that of the more interest‑rate‑sensitive 30-year bond. Is it common for newly introduced securities to trade less and with higher transaction costs, and how does security trading behavior change over time? In this post, we look back at how liquidity evolved for earlier reintroductions of Treasury securities so as to gain insight into how liquidity might evolve for the new 20-year bond.
Liberty Street Economics , Paper 20200826

Discussion Paper
The International Spillover of U.S. Monetary Policy via Global Production Linkages
di Giovanni, Julian (2021-01-06)
The recent era of globalization has witnessed growing cross-country trade integration as firms’ production chains have spread across the world, and with stock market returns becoming more correlated across countries. While research has predominantly focused on how financial integration impacts the propagation of shocks across international financial markets, trade also influences these cross-border spillovers. In particular, one important aspect, highlighted by the recent work of di Giovanni and Hale (2020), is how the global production network influences the transmission of U.S. monetary ...
Liberty Street Economics , Paper 20210106

Working Paper
Estimation of the discontinuous leverage effect: Evidence from the NASDAQ order book
Winkelmann, Lars; Neely, Christopher J.; Bibinger, Markus (2017-04-26)
An extensive empirical literature documents a generally negative correlation, named the ?leverage effect,? between asset returns and changes of volatility. It is more challenging to establish such a return-volatility relationship for jumps in high-frequency data. We propose new nonparametric methods to assess and test for a discontinuous leverage effect ? i.e. a relation between contemporaneous jumps in prices and volatility ? in high-frequency data with market microstructure noise. We present local tests and estimators for price jumps and volatility jumps. Five years of transaction data from ...
Working Papers , Paper 2017-12

Discussion Paper
How Does Tick Size Affect Treasury Market Quality?
Ruela, Francisco; Nguyen, Giang; Fleming, Michael J. (2020-01-15)
The popularity of U.S. Treasury securities as a means of pricing other securities, managing interest rate risk, and storing value is, in part, due to the efficiency and liquidity of the U.S. Treasury market. Any structural changes that might affect these attributes of the market are therefore of interest to market participants and policymakers alike. In this post, we consider how a 2018 change in the minimum price increment, or tick size, for the 2-year U.S. Treasury note affected market quality, following our recently updated New York Fed staff report.
Liberty Street Economics , Paper 20200115

Discussion Paper
Sophisticated and Unsophisticated Runs
Cipriani, Marco; La Spada, Gabriele (2021-06-02)
In March 2020, U.S. prime money market funds (MMFs) suffered heavy outflows following the liquidity shock triggered by the COVID-19 crisis. In a previous post, we characterized the run on the prime MMF industry as a whole and the role of the liquidity facility established by the Federal Reserve (the Money Market Mutual Fund Liquidity Facility) in stemming the run. In this post, based on a recent Staff Report, we contrast the behaviors of retail and institutional investors during the run and explain the different reasons behind the run.
Liberty Street Economics , Paper 20210602

Discussion Paper
Understanding the “Inconvenience” of U.S. Treasury Bonds
Du, Wenxin; Hébert, Benjamin; Li, Wenhao (2023-02-06)
The U.S. Treasury market is one of the most liquid financial markets in the world, and Treasury bonds have long been considered a safe haven for global investors. It is often believed that Treasury bonds earn a “convenience yield,” in the sense that investors are willing to accept a lower yield on them compared to other investments with the same cash flows owing to Treasury bonds’ safety and liquidity. However, since the global financial crisis (GFC), long-maturity U.S. Treasury bonds have traded at a yield consistently above the interest rate swap rate of the same maturity. The ...
Liberty Street Economics , Paper 20230206

Discussion Paper
The Global Dash for Cash in March 2020
Barone, Jordan; Chaboud, Alain P.; Copeland, Adam; Kavoussi, Cullen; Keane, Frank M.; Searls, Seth (2022-07-12)
The economic disruptions associated with the COVID-19 pandemic sparked a global dash-for-cash as investors sold securities rapidly. This selling pressure occurred across advanced sovereign bond markets and caused a deterioration in market functioning, leading to a number of central bank actions. In this post, we highlight results from a recent paper in which we show that these disruptions occurred disproportionately in the U.S. Treasury market and offer explanations for why investors’ selling pressures were more pronounced and broad-based in this market than in other sovereign bond markets.
Liberty Street Economics , Paper 20220712

Discussion Paper
When Do Trade Frictions Increase Liquidity?
Afonso, Gara (2011-12-19)
Economists tend to assume that frictions that limit trading in financial markets reduce liquidity and lower investor welfare. In this blog I discuss a recent staff study of mine that challenges that conventional wisdom. I explain how introducing trading frictions—such as circuit breakers—that slow or halt trading in an over-the-counter market experiencing a fire sale might, paradoxically, lead to higher liquidity and investor welfare.
Liberty Street Economics , Paper 20111219

Discussion Paper
The Evolving Market for U.S. Sovereign Credit Risk
Boyarchenko, Nina; Shachar, Or (2020-01-06)
How should we measure market expectations of the U.S. government failing to meet its debt obligations and thereby defaulting? A natural candidate would be to use the spreads on U.S. sovereign single-name credit default swaps (CDS): since a CDS provides insurance to the buyer for the possibility of default, an increase in the CDS spread would indicate an increase in the market-perceived probability of a credit event occurring. In this post, we argue that aggregate measures of activity in U.S. sovereign CDS mask a decrease in risk-forming transactions after 2014. That is, quoted CDS spreads in ...
Liberty Street Economics , Paper 20200106

Discussion Paper
Why Did the Recent Oil Price Declines Affect Bond Prices of Non-Energy Companies?
Li, Brandon; Sarkar, Asani (2016-10-05)
Oil prices plunged 65 percent between July 2014 and December of the following year. During this period, the yield spread?the yield of a corporate bond minus the yield of a Treasury bond of the same maturity?of energy companies shot up, indicating increased credit risk. Surprisingly, the yield spread of non?energy firms also rose even though many non?energy firms might be expected to benefit from lower energy?related costs. In this blog post, we examine this counterintuitive result. We find evidence of a liquidity spillover, whereby the bonds of more liquid non?energy firms had to be sold to ...
Liberty Street Economics , Paper 20161005

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