Market-making costs in Treasury bills: A benchmark for the cost of liquidity

Mark D. Griffiths, James T. Lindley, Drew B. Winters

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

We focus on market-making costs by examining the daily bid-ask spreads for off-the-run, one-month Treasury bills around two liquidity-changing events. Event one, Salomon Brothers' supply shock, results in a roughly 2.5-basis-point increase in the spread because of an increase in ask prices; and event two, the Long-Term Capital Management demand shock, results in a doubling of the spread because of a decrease in bid prices. Our results provide a benchmark for researchers examining bid-ask spreads of securities that include a liquidity premium, a risk premium, and an asymmetric information premium.

Original languageEnglish
Pages (from-to)2146-2157
Number of pages12
JournalJournal of Banking and Finance
Volume34
Issue number9
DOIs
StatePublished - Sep 2010

Keywords

  • Bid-ask spread
  • Liquidity
  • Market-making costs

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