Price Discovery in the U.S. Treasury Market

FRB of St. Louis Working Paper No. 2005-070C

32 Pages Posted: 6 Sep 2006

See all articles by Bruce Mizrach

Bruce Mizrach

Rutgers University, Department of Economics

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

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

Mizrach, Bruce and Neely, Christopher J., Price Discovery in the U.S. Treasury Market (September 2006). FRB of St. Louis Working Paper No. 2005-070C, Available at SSRN: https://ssrn.com/abstract=928501 or http://dx.doi.org/10.2139/ssrn.928501

Bruce Mizrach

Rutgers University, Department of Economics ( email )

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Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

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HOME PAGE: http://research.stlouisfed.org/econ/cneely/sel