Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93594
Authors: 
Engle, Robert
Fleming, Michael
Ghysels, Eric
Nguyen, Giang
Year of Publication: 
2012
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 590
Abstract: 
We propose a new class of dynamic order book models that allow us to 1) study episodes of extreme low liquidity and 2) unite liquidity and volatility in one framework through which their joint dynamics can be examined. Liquidity and volatility in the U.S. Treasury securities market are analyzed around the time of economic announcements, throughout the recent financial crisis, and during flight-to-safety episodes. We document that Treasury market depth declines sharply during the crisis, accompanied by increased price volatility, but that trading activity seems unaffected until after the Lehman Brothers bankruptcy. Our models' key finding is that price volatility and depth at the best bid and ask prices exhibit a negative feedback relationship and that each becomes more persistent during the crisis. Lastly, we characterize the Treasury market during flights to safety as having much lower market depth, along with higher trading volume and greater price uncertainty.
Subjects: 
liquidity
Treasury market
limit order book
financial crisis
volatility
announcement
JEL: 
C58
G01
G12
Document Type: 
Working Paper

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