“Information Shocks, Liquidity Shocks, Jumps, and Price Discovery — Evidence from the U.S. Treasury Market” by Ingrid Lo
Bank of Canada
University of Arizona
We examine large price changes, known as jumps, in the U.S. Treasury market. Using recently developed statistical tools, we identify price jumps in the 2-, 3-, 5-, 10-year notes and 30-year bond during the period of 2005-2006. Our results show that jumps mostly occur during pre-scheduled macroeconomic announcements. Nevertheless, announcement surprises have limited power in explaining bond price jumps. Our analysis shows that pre-announcement liquidity shocks have significant predictive power for price jumps in the U.S. Treasury market even after controlling for the effect of information shocks. Compared to announcements with no jumps, jumps at announcements are often preceded by a more significant increase of volatility, more dramatic widening of the bid-ask spread, and a more significant drop in market depth. Finally, we present evidence that jumps serve as a dramatic form of price discovery, and that post-jump order flow has less impact on bond prices.