Search Results
Discussion Paper
Market Liquidity after the Financial Crisis
The possible adverse effects of regulation on market liquidity in the post-crisis period continue to garner significant attention. In a recent paper, we update and unify much of our earlier work on the subject, following up on three series of earlier Liberty Street Economics posts in August 2015, October 2015, and February 2016. We find that dealer balance sheets have continued to stagnate and that various measures point to less abundant funding liquidity. Nonetheless, we do not find clear evidence of a widespread deterioration in market liquidity.
Market Liquidity and the Quantity Theory of Money
A rising federal funds rate means there is less liquidity in the market, which could help reduce the inflation rate in the months ahead.
Report
Tick Size, Competition for Liquidity Provision, and Price Discovery: Evidence from the U.S. Treasury Market
This paper studies how a tick size change affects market quality, price discovery, and the competition for liquidity provision by dealers and high-frequency trading firms (HFTs) in the U.S. Treasury market. Employing difference-in-differences regressions around the November 19, 2018 tick size reduction in the two-year Treasury note and a similar change for the two-year futures eight weeks later, we find significantly improved market quality. Moreover, dealers become more competitive in liquidity provision and price improvement, consistent with the hypothesis that HFTs find liquidity provision ...
Speech
The transition to a robust reference rate regime: remarks at Bank of England’s Markets Forum 2018, London, England
Remarks at Bank of England?s Markets Forum 2018, London, England.
Report
The Evolution of Treasury Market Liquidity: Evidence from 30 Years of Limit Order Book Data
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 ...
Report
Intraday market making with overnight inventory costs
The U.S. Treasury market is highly intermediated by nonbank principal trading firms (PTFs). Limited capital forces PTFs to end the trading day roughly flat. We construct a continuous time market making model to analyze the trade-off faced by a profit-maximizing firm with overnight inventory costs, and develop closed-form representations of the optimal price policy functions. Our model reveals that bid-ask spreads widen as the end of the trading day approaches, and that increases in order arrival rates do not always lead to higher price volatility. Our empirical analysis shows that ...
Working Paper
Secondary Market Liquidity and the Optimal Capital Structure
We present a model where endogenous liquidity generates a feedback loop between secondary market liquidity and firms' financing decisions in primary markets. The model features two key frictions: a costly state verification problem in primary markets, and search frictions in over-the-counter secondary markets. Our concept of liquidity depends endogenously on illiquid assets put up for sale relative to the resources available for buying those assets in the secondary market. Liquidity determines the liquidity premium, which affects issuance in the primary market, and this effect feeds back into ...
Discussion Paper
Market Function Purchases by the Federal Reserve
In response to disorderly market conditions in mid-March 2020, the Federal Reserve began an asset purchase program designed to improve market functioning in the Treasury and agency mortgage-backed securities (MBS) markets. The 2020 purchases have no parallel, but there are several instances of large SOMA purchases undertaken to support Treasury market functions in earlier decades. This post recaps three such episodes, one in 1939 at the start of World War II, one in 1958 in connection with a poorly received Treasury financing, and a third in 1970, also in connection with a Treasury financing. ...
Discussion Paper
Has Treasury Market Liquidity Improved in 2024?
Standard metrics point to an improvement in Treasury market liquidity in 2024 to levels last seen before the start of the current monetary policy tightening cycle. Volatility has also trended down, consistent with the improved liquidity. While at least one market functioning metric has worsened in recent months, that measure is an indirect gauge of market liquidity and suggests a level of current functioning that is far better than at the peak seen during the global financial crisis (GFC).
Speech
Market and funding liquidity: an overview, remarks at the Federal Reserve Bank of Atlanta 2016 Financial Markets Conference, Fernandina Beach, Florida, May 2016
Remarks at the Federal Reserve Bank of Atlanta 2016 Financial Markets Conference, Fernandina Beach, Florida.