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Institutional Affiliation: Princeton University
NBER Working Papers and Publications
|October 2010||Noise as Information for Illiquidity|
with Jun Pan, Jiang Wang: w16468
We propose a broad measure of liquidity for the overall financial market by exploiting its connection with the amount of arbitrage capital in the market and the potential impact on price deviations in US Treasurys. When arbitrage capital is abundant, we expect the arbitrage forces to smooth out the Treasury yield curve and keep the dispersion low. During market crises, the shortage of arbitrage capital leaves the yields to move more freely relative to the curve, resulting in more "noise.'' As such, noise in the Treasury market can be informative and we expect this information about liquidity to reflect the broad market conditions because of the central importance of the Treasury market and its low intrinsic noise -- high liquidity and low credit risk. Indeed, we find that our "noise'' ...
Published: “Noise as Information for Illiquidi ty,” (with Xing Hu and Jiang Wang), Journal of Finance , volume 68, pages 2223-2772, 2013. citation courtesy of