2018/12/18 by Paolo Pasquariello, Jennifer Roush, Jennifer E. Roush +1 · 31 citations
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Business #Credit Risk and Financial Regulations #Economic interventionism #Economics #Finance #Financial Markets and Investment Strategies #Financial economics #Financial system #Intervention (counseling) #Market liquidity #Monetary economics #Monetary policy #Open market operation #Sample (material) #Security market #Speculation #Treasury #Volatility (finance)
paper · pdf · doi:10.1017/s0022109018001552
published in Journal of Financial and Quantitative Analysis 55(1), 117-157 (Cambridge University Press)
openalex publication_date 2018/12/18 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/28
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.