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Anticipated and repeated shocks in liquid markets

Lou, Dong and Yan, Hongjun and Zhang, Jinfan (2013) Anticipated and repeated shocks in liquid markets. Review of Financial Studies, 26 (8). pp. 1891-1912. ISSN 0893-9454

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Identification Number: 10.1093/rfs/hht034

Abstract

We show that Treasury security prices in the secondary market decrease significantly in the few days before Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. These results are linked to dealers' limited risk-bearing capacity and end-investors' imperfect capital mobility, highlighting the important role of frictions even in very liquid financial markets. Our results imply a hidden issuance cost to the U.S. Department of the Treasury, estimated to be 9 to 18 bps of the auction size, or over half a billion dollars for the issuance size in 2007.

Item Type: Article
Official URL: http://rfs.oxfordjournals.org/
Additional Information: © 2013 The Author
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Sets: Departments > Finance
Collections > Economists Online
Date Deposited: 14 Aug 2013 15:02
Last Modified: 26 Jun 2014 09:49
Projects: 70932003
Funders: Paul Woolley Center at the London School of Economics, Whitebox Advisors Research Grant, National Natural Science Foundation of China
URI: http://eprints.lse.ac.uk/id/eprint/46329

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