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Kenan Institute 2024 Grand Challenge: Business Resilience
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Market-Based Solutions to Vital Economic Issues
Research
Aug 1, 2020

Liquidity and Volatility in the U.S. Treasury Market

Abstract

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 (2000)’s 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.


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