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
Giang Nguyen, Robert F. Engle,
Michael J. Fleming, and
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
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.