The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market

41 Pages Posted: 7 Mar 2002

See all articles by David Goldreich

David Goldreich

University of Toronto - Rotman School of Management

Bernd Hanke

London Business School - Institute of Finance and Accounting

Purnendu Nath

London Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 4, 2002

Abstract

This paper examines the price differences between very liquid on-the-run U.S. Treasury securities and less liquid off-the-run securities over the entire on/off cycle. By comparing pairs of securities as their relative liquidity varies over time we can disregard any cross-sectional differences between the securities. Since the liquidity varies predictably over time we are able to differentiate between current liquidity and expected future liquidity. We show that the more liquid security is priced higher on average, but that this difference depends on the amount of expected future liquidity over its remaining lifetime rather than its current liquidity. We measure future liquidity using both quotes and trades. The measures include bid-ask spread, depth and trading activity. Examining a variety of liquidity measures enables us to evaluate their relative importance and identify the liquidity proxies that most affect prices. Although all of the measures are highly correlated with one another, we find that quotes are more important when estimating the effect of the bid-ask spread and depth on the liquidity premium, while the number of trades and trading volume is a more important measure of market activity than the number of quotes.

Keywords: Liquidity, Asset Pricing

JEL Classification: G12, G14

Suggested Citation

Goldreich, David and Hanke, Bernt and Nath, Purnendu, The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market (June 4, 2002). Available at SSRN: https://ssrn.com/abstract=301967 or http://dx.doi.org/10.2139/ssrn.301967

David Goldreich (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-0833 (Phone)

Bernt Hanke

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Purnendu Nath

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://phd.london.edu/pnath

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