Author:
Pasquariello Paolo,Roush Jennifer,Vega Clara
Abstract
We study the impact of permanent open market operations (POMOs) by the Federal Reserve on U.S. Treasury market liquidity. Using a parsimonious model of speculative trading, we conjecture that i) this form of government intervention improves market liquidity, contrary to conclusions drawn by existing literature; and ii) the extent of this improvement depends on the market’s information environment. Evidence from a novel sample of Federal Reserve POMOs during the 2000s indicates that bid–ask spreads of on-the-run Treasury securities decline when POMOs are executed, by an amount increasing in proxies for information heterogeneity among speculators, fundamental volatility, and POMO policy uncertainty, consistent with our model.
Publisher
Cambridge University Press (CUP)
Subject
Economics and Econometrics,Finance,Accounting
Cited by
20 articles.
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