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Journal of Finance Vol. 59 No. 6 2004

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

Michael W. Brandt1,2; Kenneth A. Kavajecz1,3,2

1 California University of Pennsylvania · 2 University of Pennsylvania · 3 Veterinarians Without Borders

open access

Abstract

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) account for up to 26% 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 in understanding the behavior of the yield curve.

DOI
10.1111/j.1540-6261.2004.00711.x
Volume
59
Issue
6
Pages
2623-2654
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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