Staff Reports

Measuring Treasury Market Liquidity

July 2001Number 133
JEL classification: G14

Author: Michael J. Fleming

This paper examines a comprehensive set of liquidity measures for the U.S. Treasury market. The measures are analyzed relative to one another, across securities, and over time. I find highly significant price impact coefficients, such that a simple model that explains price changes with net order flow produces an R2 statistic above 30 percent for the two-year note. The price impact coefficients are highly correlated with bid-ask spreads and with episodes of reported poor liquidity (such as the fall 1998 financial markets turmoil). Quote and trade sizes correlate modestly with these episodes and with the other liquidity measures, as do yield spreads between on-the-run and off-the-run securities. In contrast, trading volume and trading frequency are only weakly correlated with these other measures, suggesting that they are poor liquidity proxies. The various measures are positively correlated across securities, almost without exception, especially for Treasury notes.

Available only in PDFPDF57 pages / 608 kb

For a published version of this report, see Michael J. Fleming, "Measuring Treasury Market Liquidity," Federal Reserve Bank of New York Economic Policy Review 9, no.3 (September 2003): 83-108.

PDF published versionPDF26 pages / 327 kb