Staff Reports
Liquidity and Volatility in the U.S. Treasury Market
Previous title: "Liquidity, Volatility and Flights to Safety in the U.S. Treasury Market: Evidence From A New Class of Dynamic Order Book Models"
December 2012 Number 590
Revised November 2018
JEL classification: C58, G01, G12

Authors: Giang Nguyen, Robert F. Engle, Michael J. Fleming, and Eric Ghysels

We model the joint dynamics of intraday liquidity, volume, and volatility in the U.S. Treasury market, especially through the 2007-09 financial crisis and around important economic announcements. Using various specifications based on Bauwens and Giot’s (2000) Log- ACD(1,1) model, we find that liquidity, volume, and volatility are highly persistent, with volatility having a lower short-term persistence than the other two. Market liquidity and volume are important to explaining volatility dynamics but not vice versa. In addition, market dynamics change during the financial crisis, with all variables exhibiting increased responsiveness to their most recent realizations. Our models also reveal different market dynamics around announcements. Finally, we introduce new measures of liquidity risk that are useful for continually monitoring liquidity conditions and the risk of liquidity stress in the market.
Available only in PDF pdf

For a published version of this report, see Giang Nguyen, Robert Engle, Michael Fleming, and Eric Ghysels, “Liquidity and Volatility in the U.S. Treasury Market,” Journal of Econometrics, Vol. 217, No. 2 (August 2020): 207–29.
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