Working Paper: NBER ID: w9529
Authors: Michael W. Brandt; Kenneth A. Kavajecz
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) 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.
Keywords: Price Discovery; US Treasury Market; Orderflow; Yield Curve; Liquidity
JEL Codes: G0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Orderflow imbalances (C69) | Yield curve (E43) |
| Increased buying pressure (G19) | Lower yields (Q15) |
| Selling pressure (G19) | Higher yields (Q15) |
| One standard deviation increase in orderflow (C69) | Yield changes of over 25 basis points (E43) |
| Yield changes (E43) | Permanent over at least two weeks (C41) |
| Low liquidity conditions (E44) | Amplified effect of orderflow on yields (E43) |
| Orderflow (C69) | Price discovery process (D47) |