Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve

Michael W. Brandt, Kenneth A. Kavajecz

NBER Working Paper No. 9529
Issued in March 2003
NBER Program(s):   AP   ME

We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) can account for as much as 26 percent of the day-to-day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity is low. All of the evidence points toward an important role of price discovery on understanding the behavior of the yield curve.

(249 K)

Published: Brandt, Michael W. and Kenneth A. Kavajecz. "Price Discovery In The U.S. Treasury Market: The Impact Of Orderflow And Liquidity On The Yield Curve," Journal of Finance, 2004, v59(6,Dec), 2623-2654.

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