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Information Shocks, Liquidity Shocks, Jumps, and Price Discovery: Evidence from the U.S. Treasury Market

Published online by Cambridge University Press:  14 December 2010

George J. Jiang ,
Ingrid Lo  and
Adrien Verdelhan
George J. Jiang
Affiliation:
Eller College of Management, University of Arizona, PO Box 210108, Tucson, AZ 85721. gjiang@email.arizona.edu
Ingrid Lo
Affiliation:
Financial Markets Department, Bank of Canada, 234 Wellington St., Ottawa, ONT K1A 0G9, Canada. ingridlo@bankofcanada.ca
Adrien Verdelhan
Affiliation:
Sloan School of Management, Massachusetts Institute of Technology, 77 Massachusetts Ave., #E62-621, Cambridge, MA 02139. adrienv@mit.edu
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Abstract

In this paper, we identify jumps in U.S. Treasury-bond (T-bond) prices and investigate what causes such unexpected large price changes. In particular, we examine the relative importance of macroeconomic news announcements versus variation in market liquidity in explaining the observed jumps in the U.S. Treasury market. We show that while jumps occur mostly at prescheduled macroeconomic announcement times, announcement surprises have limited power in explaining bond price jumps. Our analysis further shows that preannouncement liquidity shocks, such as changes in the bid-ask spread and market depth, have significant predictive power for jumps. The predictive power is significant even after controlling for information shocks. Finally, we present evidence that post-jump order flow is less informative relative to the case where there is no jump at announcement.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 2 , April 2011 , pp. 527 - 551
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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