Through explicitly incorporating analysts ’ forecasts as observable factors in a dynamic arbitragefree model of the yield curve, this paper proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about inflation, output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Although perceptions about inflation are largely responsible for movements in long-term interest rates, an explicit slope factor is necessary to adequately capture the dynamics of the yield curve. Macroeconomic forecasts play an important role in explaining time-variation in the market prices of risk, with forecasted GDP growth playing a dominant role. The estimated coefficients from a forward-looking monetary policy rule support the assertion that the central bank preemptively reacts to inflationary expectations while suggesting patience in accommodating real output growth expectations. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations due to the arrival of news or central bank statements and announcements.

[Through explicitly incorporating analysts' forecasts as observable factors in a dynamic arbitrage-free model of the yield curve, this research proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities. An empirical examination reveals that survey expectations about inflation, output growth, and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields. Estimates from a forward-looking monetary policy rule suggest that the central bank exhibits a preemptive response to inflationary expectations while accommodating output growth and monetary policy expectations. Forecasted GDP growth plays a significant role in explaining time variation in the market prices of risk. The sensitivity of long yields is linked to the persistence of expected inflation under the risk-neutral measure. Models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations.]

Using limit order books across all US exchanges, we show that while liquidity for small orders (e.g., the quoted and effective spreads) decreases, liquidity for large orders (e.g., the cumulative depth and the price impact of multiple trades) improves after the implementation of the Tick Size Pilot Program. We find significant spillover effects on liquidity for small and large orders that extend beyond the top of the book. Finally, we show that the pilot program results in an improvement in pricing efficiency, an increase in trade size, and a decrease in the number of trades.