EDHEC

THE U.S. TREASURY MARKET LIQUIDITY AND 2008-2009 FINANCIAL CRISIS BY JUI-YU LEE MSc FINANCE.

ABSTRACT.

THE STUDY EXAMINES THE U.S. TREASURY SECURITIES LIQUIDITY DURING 2008-2009 FINANCIAL CRISIS. THE SEARCH IS TO INVESTIGATE WHETHER THE LIQUIDITY OF TREASURY SECURITIES IS LOWER AFTER FINANCIAL CRISIS THAN PEACEFUL PERIOD OF TIME AND WHETHER THE ILLIQUID BOND WOULD REQUIRE HIGHER RETURN RATE AS PREMIUM. THE EMPIRICAL RESULT SHOWS THAT THE LIQUIDITY LEVEL DOES NOT CHANGE SIGNIFICANTLY. DESPITE THE FACT THAT ON-THE-RUN TREASURY SECURITY IS HIGHLY LIQUID, IT WOULD ALSO PROVE THAT THE FINANCIAL CRISIS DOES NOT HAVE SIGNIFICANT IMPACT ON LIQUIDITY OF TREASURY MARKET ACROSS DIFFERENT RANGES OF MATURITIES. THAT IS TO SAY, THE U.S. TREASURY REMAINS ITS LIQUIDITY ALTHOUGH THE STOCK MARKET WAS IN TROUBLE, INVESTORS DID NOT WITHDRAW FROM TREASURY MARKET AS THEY DID FROM STOCK MARKET, REINFORCING THE FACT THAT TREASURIES ARE PERCEIVED AS HIGH CREDIT AND QUALITY. MOREOVER, AMONG TREASURY SECURITIES, THE ILLIQUIDITY IS INCREASING IN AGES THAT THE SECURITIES WITH SHORTER TIME TO MATURITY WOULD HAVE HIGHER LIQUIDITY, WHEREAS THOSE WITH LONGER TIME TO MATURITY WOULD HAVE LOWER LIQUIDITY.

BY COMPUTING CUMULATIVE TERM SPREADS WITH VARIOUS LENGTHS OF EVEN-WINDOW, IT APPEARS A POSITIVE RELATIONSHIP BETWEEN ILLIQUIDITY AND CUMULATIVE TERM SPREADS, SUGGESTING THAT HIGHER ILLIQUIDITY RISK OF SECURITY REQUIRES HIGHER RETURN AS COMPENSATIONS. THE THEORY OF LIQUIDITY EFFECTS ON BID-ASK SPREAD FOUND IN THIS STUDY IS CONSISTENT WITH FORMER LITERATURE.

JUI-YU, LEE

EDHEC BUSINESS SCHOOL

MSc FINANCE

THESIS TUTOR : PHILIPPE-HENRI LATIMIER, Ph.D.

DATE : SEPTEMBER 26, 2011.

EDHEC BUSINESS SCHOOL DOES NOT EXPRESS APPROVAL OR DISAPPROVAL CONCERNING THE OPINIONS GIVEN IN THIS PAPER WHICH ARE THE SOLE RESPONSIBILITY OF THE AUTHOR.