Order Imbalance, Liquidity, and Returns of the U.S. Treasury Market

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Article number1250010
Journal / PublicationReview of Pacific Basin Financial Markets and Policies
Issue number2
Publication statusPublished - Jun 2012


Previous studies have documented the informational role of order imbalances in price discovery of the Treasury market. In this paper, we explore the liquidity dimension of order imbalances. Through our research, we find evidence which indicates that order imbalances affect Treasury market liquidity. More importantly, order imbalances have significant effects on Treasury market returns and volatility, consistent with the contention that order imbalances can cause an inventory problem of marketwide concern. Results suggest that a significant portion of the effect of order imbalances on price and quoted spread is associated with the inventory premium that compensates market participants for providing liquidity to uninformed traders. The effects of order imbalances on market liquidity, returns and volatility are stronger for two- and five-year notes and Treasury bills. Furthermore, there is commonality in order imbalances. Sensitivity of order imbalances individual bonds to marketwide order imbalances varies across securities. © 2012 World Scientific Publishing Co. and Center for Pacific Basin Business, Economics and Finance Research.

Research Area(s)

  • Order imbalances, liquidity, commonality in order imbalances, liquidity spillover