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Article

Optimal Measure and Drivers of U.S. Treasury Market (Il)Liquidity: Will Low Liquidity Be the New Normal?

Devdeep Sarkar and Joshua Younger
The Journal of Trading Summer 2015, 10 (3) 57-64; DOI: https://doi.org/10.3905/jot.2015.10.3.057
Devdeep Sarkar
is a fixed income strategist at J.P. Morgan in New York, NY.
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  • For correspondence: devdeep.sarkar@jpmorgan.com
Joshua Younger
is a fixed income strategist at J.P. Morgan in New York, NY.
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  • For correspondence: joshua.d.younger@jpmorgan.com
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Abstract

Recent bouts of volatility in the Treasury market, exacerbated by stubbornly depressed liquidity, have caught the attention of a large number of market participants. In this article, the authors compare several popular measures of U.S. Treasury market liquidity and attempt to identify the driving forces behind the recent decline. Their analysis shows that Treasury market depth is the best measure of liquidity, as it has historically done an excellent job in forecasting volatility and is conceptually more appealing than other popular measures, such as bid–ask spreads and trading volume. Although uncertainty regarding the path of U.S. monetary policy has been partly responsible for the recent decline in liquidity, the authors suggest that structural changes in the marketplace have helped aggravate the situation. Increasingly active queue management has led market makers to withdraw liquidity in times of heightened volatility, and regulatory constraints have restricted dealers’ ability to provide liquidity, because they are incentivized to hold smaller inventories than in the past and are generally more risk averse.

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The Journal of Trading: 10 (3)
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Optimal Measure and Drivers of U.S. Treasury Market (Il)Liquidity: Will Low Liquidity Be the New Normal?
Devdeep Sarkar, Joshua Younger
The Journal of Trading Jun 2015, 10 (3) 57-64; DOI: 10.3905/jot.2015.10.3.057

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Optimal Measure and Drivers of U.S. Treasury Market (Il)Liquidity: Will Low Liquidity Be the New Normal?
Devdeep Sarkar, Joshua Younger
The Journal of Trading Jun 2015, 10 (3) 57-64; DOI: 10.3905/jot.2015.10.3.057
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  • Article
    • Abstract
    • VARIOUS MEASURES OF LIQUIDITY AND THEIR RELATIVE MERITS
    • RECENT DECLINE IN LIQUIDITY: CYCLICAL CHANGE OR A STRUCTURAL SHIFT?
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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