Price Discovery in the U.S. Treasury Market
FRB of St. Louis Working Paper No. 2005-070C
32 Pages Posted: 6 Sep 2006
Date Written: September 2006
Abstract
This paper is the first to characterize the tatonnement of high-frequency returns from U.S. Treasury spot and futures markets. In particular, we highlight the previously neglected role of the futures markets in price discovery. The lower-bound estimate of bivariate information shares for 30-year Treasury futures typically exceeds 50% from 1998 on. Standard liquidity measures, including the proportion of trades and relative bid-ask spreads, explain daily information shares. These conclusions still hold when one controls for days of macroeconomic announcements. Finally, a 5-dimensional cointegrated system explains a high percentage of Treasury returns. In that system, the 30-year futures contract and the 5-year spot market dominate price discovery.
Keywords: price discovery, Treasury market, microstructure, GovPX, futures, information shares
JEL Classification: G14, G12, D4, C32
Suggested Citation: Suggested Citation
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