Report

The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data

Abstract: This paper uses order book and transactions data from the U.S. Treasury securities market to calculate daily liquidity measures for a thirty-year sample period (1991–2021). We then construct a daily index of liquidity from bid-ask spreads, quoted depth, and price impact, reflecting the fact that the varying measures capture different aspects of market liquidity. The index is highly correlated with liquidity proxies proposed in the literature, but is more sensitive to short-term drivers of liquidity, suggesting that it better measures contemporaneous liquidity (as opposed to expected future liquidity). In March 2020, in particular, the index peaks at a level commensurate with that seen during the 2007–09 global financial crisis, whereas the liquidity proxies peak at much lower levels. Significant drivers of market liquidity include announcements, implied volatility, and the extent to which high-frequency traders are present in the market.

JEL Classification: G12;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2017-11-01

Number: 827

Note: Revised January 2023. Previous title: “An index of Treasury Market liquidity: 1991-2017”