Three Essays on the U.S. Treasury Market

<p>My thesis consists of three essays on market microstructure. Focusing on the U.S. Treasury market, I investigate several interesting research questions by using twelve years of BrokerTec order books of 2-, 5-, and 10-year on-the-run U.S. Treasury notes from January 1, 2004 to December 31, 2015, and five years of BrokerTec order books of 3-, 7- and 30-year on-the-run U.S. Treasury securities from January 1, 2011 to December 31, 2015. In the U.S. Treasury market, BrokerTec is one of the two dominant electronic communication networks (ECNs). According to my calculations by using BrokerTec order books from 2011 to 2015, the average daily trading volume of BrokerTec on-the-run U.S. Treasury securities is about 134.9 billion U.S. dollars, which accounts for about 26% of that of the total U.S. Treasury primary dealer activity. To help a wider audience better understand the importance of the research questions in the following three chapters, Chapter 1 gives a brief introduction to the U.S. Treasury market. In Chapter 2, I investigate the impact of scheduled macroeconomic news announcements on the U.S. Treasury market efficiency. To control the microstructure noise, I employ a robust method to construct market inefficiency measures. I find that the U.S. Treasury market becomes less efficient starting from five minutes before news arrivals. The finding is robust for different sample periods, macroeconomic news announcements, and market inefficiency measures. Investor heterogeneity could explain the decreased market efficiency before scheduled news announcements. In Chapter 3, I investigate the impact of workup trading protocols on the U.S. Treasury market quality. Each transaction on the lit pool opens a workup window, during which the BrokerTec trading platform continues to receive order submissions and modifications, but only matches workup orders that have the same prices. Each workup transaction starts a new counting down of the workup clock. A workup window naturally closes either after the workup times out or when a limit order is submitted at a better price. I find that the workup trading activities decrease the market quality, in aspects of market efficiency and market liquidity. In Chapter 4, I empirically examine the role of heterogeneity in traders’ beliefs and public information shocks on traders’ order submission decisions around news announcements in the U.S. Treasury market. I find that during both the pre-announcement period and the post-announcement period, the traders tend to submit more market orders and aggressive limit orders when the market uncertainty is high. I also find that the belief heterogeneity influences investors’ trading behavior and order submission strategies around news announcements. The role of the belief heterogeneity on order aggressiveness depends on the type of news, and the magnitude of the information shocks. The impact of market uncertainty and belief heterogeneity influences traders’ submission of both of the market orders and aggressive limit orders. In Chapter 5, I provide a summary on the research findings in Chapter 2, Chapter 3 and Chapter 4. I also discuss the contributions of this thesis to the literature.</p>

Three Essays on the U.S. Treasury Market

<p>My thesis consists of three essays on market microstructure. Focusing on the U.S. Treasury market, I investigate several interesting research questions by using twelve years of BrokerTec order books of 2-, 5-, and 10-year on-the-run U.S. Treasury notes from January 1, 2004 to December 31, 2015, and five years of BrokerTec order books of 3-, 7- and 30-year on-the-run U.S. Treasury securities from January 1, 2011 to December 31, 2015. In the U.S. Treasury market, BrokerTec is one of the two dominant electronic communication networks (ECNs). According to my calculations by using BrokerTec order books from 2011 to 2015, the average daily trading volume of BrokerTec on-the-run U.S. Treasury securities is about 134.9 billion U.S. dollars, which accounts for about 26% of that of the total U.S. Treasury primary dealer activity. To help a wider audience better understand the importance of the research questions in the following three chapters, Chapter 1 gives a brief introduction to the U.S. Treasury market. In Chapter 2, I investigate the impact of scheduled macroeconomic news announcements on the U.S. Treasury market efficiency. To control the microstructure noise, I employ a robust method to construct market inefficiency measures. I find that the U.S. Treasury market becomes less efficient starting from five minutes before news arrivals. The finding is robust for different sample periods, macroeconomic news announcements, and market inefficiency measures. Investor heterogeneity could explain the decreased market efficiency before scheduled news announcements. In Chapter 3, I investigate the impact of workup trading protocols on the U.S. Treasury market quality. Each transaction on the lit pool opens a workup window, during which the BrokerTec trading platform continues to receive order submissions and modifications, but only matches workup orders that have the same prices. Each workup transaction starts a new counting down of the workup clock. A workup window naturally closes either after the workup times out or when a limit order is submitted at a better price. I find that the workup trading activities decrease the market quality, in aspects of market efficiency and market liquidity. In Chapter 4, I empirically examine the role of heterogeneity in traders’ beliefs and public information shocks on traders’ order submission decisions around news announcements in the U.S. Treasury market. I find that during both the pre-announcement period and the post-announcement period, the traders tend to submit more market orders and aggressive limit orders when the market uncertainty is high. I also find that the belief heterogeneity influences investors’ trading behavior and order submission strategies around news announcements. The role of the belief heterogeneity on order aggressiveness depends on the type of news, and the magnitude of the information shocks. The impact of market uncertainty and belief heterogeneity influences traders’ submission of both of the market orders and aggressive limit orders. In Chapter 5, I provide a summary on the research findings in Chapter 2, Chapter 3 and Chapter 4. I also discuss the contributions of this thesis to the literature.</p>

What Drives U.S. Treasury Re-use?

We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's total secured funding and their outright holdings financed through secured funding. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.

UNCERTAINTY RELATED TO INFECTIOUS DISEASES AND FORECASTABILITY OF THE REALIZED VOLATILITY OF US TREASURY SECURITIES

This paper aims to examine the predictive power of the daily newspaper-based index uncertainty related to infectious diseases (EMVID) for the US Treasury securities’ realized volatility (RV) using the heterogonous autoregressive volatility (HAV-RV) model. In our out-of-sample forecast, we find strong significant evidence on the role of the EMVID index in forecasting the volatility of the US Treasury securities in the short-, medium- and long-run horizons except for the US 2-Year Treasury-Note (T-Note) Futures. Assessing the EMVID index role during the COVID-19 episode, we find that even in this short period, the index role in predicting the US Treasury securities is highly significant. These findings have important implications for portfolio managers and investors in times of unprecedented levels of uncertainty resulting from epidemic and pandemic diseases.

A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions

We shed light on computational challenges when fitting the Nelson-Siegel, Bliss and Svensson parsimonious yield curve models to observed US Treasury securities with maturities up to 30 years. As model parameters have a specific financial meaning, the stability of their estimated values over time becomes relevant when their dynamic behavior is interpreted in risk-return models. Our study is the first in the literature that compares the stability of estimated model parameters among different parsimonious models and for different approaches for predefining initial parameter values. We find that the Nelson-Siegel parameter estimates are more stable and conserve their intrinsic economical interpretation. Results reveal in addition the patterns of confounding effects in the Svensson model. To obtain the most stable and intuitive parameter estimates over time, we recommend the use of the Nelson-Siegel model by taking initial parameter values derived from the observed yields. The implications of excluding Treasury bills, constraining parameters and reducing clusters across time to maturity are also investigated.

Działania antykryzysowe w obszarze kultury w trakcie pandemii SARS-CoV-2. Stan obecny i wnioski de lege ferenda w zakresie zwiększenia partycypacji obywatelskiej oraz instytucjonalnej

The aim of the article is to analyse alternative legal solutions in the field of supporting cultural institutions during the epidemic. A review of the activities of the Ministry of Culture and National Heritage in the area of supporting cultural institutions in Poland during the epidemic as of May 2020 was carried out. Based on the analysis, de lege ferenda conclusions regarding new possibilities of financing the activities of such institutions were identified. The authors present legal solutions concerning the transfer of 1% PIT, deduction of donations, issue of revenue bonds and financing in the form of treasury securities. The conclusions of the research conducted by the authors are embedded in the area of economic analysis of law (Law&Economics).

What Drives U.S. Treasury Re-use?

We study what drives the re-use of U.S. Treasury securities in the financial system. Using confidential supervisory data, we estimate the degree of collateral re-use at the dealer level through their collateral multiplier : the ratio between a dealer's secured funding and their outright holdings. We find that Treasury re-use increases as the supply of available securities decreases, especially when supply declines due to Federal Reserve asset purchases. We also find that non-U.S. dealers' re-use increases when profits from intermediating cash are high, U.S. dealers' re-use increases when demand to source on-the-run Treasuries is high, and both types of dealers' re-use can alleviate safe asset scarcity. Finally, we document a sharp drop in Treasury re-use at the onset of the COVID-19 pandemic, with a subsequent reversal after the Federal Reserve's intervention to support market functioning.

The Behavior of Fixed-income Funds during COVID-19 Market Turmoil

This note analyzes the stress experienced (and caused) by open-end mutual funds during the March COVID-19 stress episode, with a focus on global fixed-income funds. In light of increased valuation uncertainty, funds experienced a short period of intense withdrawals while the market liquidity of their holdings deteriorated substantially. To cover redemptions, afflicted funds predominantly shed liquid assets first—for example, cash, cash equivalents, and US Treasury securities. But forced asset sales amplified price pressures in markets and contributed to liquidity falling across fixed-income markets. This drop in market liquidity, as well as the general stress in financial markets, may have led to fund investors becoming even more sensitive to challenging portfolio performance and encouraged further withdrawals. Only after central banks intervened, directly and indirectly supporting asset managers, did liquidity and redemption stress subside. Overall, the March episode validated the financial-stability concerns about liquidity vulnerabilities in the fund industry and calls for further action to address them.