US treasury market liquidity, monetary surprises, and uncertainty
by Tarek Chebbi; Ahmed Ben Haj Hammouda; Waleed Hmedat
International Journal of Monetary Economics and Finance (IJMEF), Vol. 16, No. 6, 2023

Abstract: This paper studies the effects of the asset purchase program announcements by the Federal Reserve on the liquidity of the US Treasury market between October 2008 and November 2014. The study period comprises the most important Fed interventions in terms of asset sovereign bond purchases which were carried out in different phases. These programs successfully improved the market conditions namely in the five-day window after the announcement. However, our findings indicate that the liquidity condition dynamics do not seem to matter for monetary anticipation effect. Also, the reaction of the liquidity was found to be more sensitive to negative surprises, particularly when purchase activity leads to more stimulative financial environment expressed in terms of lower long-term yields. The results indicate also that uncertainty surrounding the monetary announcements has non-negligible effects on the impact of monetary surprises on liquidity conditions. In particular, as one would expect, the connection between monetary news and liquidity was mostly disturbed in the presence of higher monetary uncertainty.

Online publication date: Tue, 16-Jan-2024

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