Anticipated and Repeated Shocks in Liquid Markets

Abstract

Dong Lou has been teaching at the London School of Economics since July 2009. He earned his PhD in Finance from Yale University and a B.S. in Computer Science from Columbia University. His research mostly focuses on understanding market inefficiencies, and their distortionary effects on resource allocation in the real economy. Hongjun Yan is an Associate Professor of Finance at the Yale School of Management. He received his PhD from the London Business School in 2005. The focus of his current research is to better understand the behaviour of asset prices by incorporating bounded rationality, heterogeneous beliefs, reputation, learning and market imperfections etc. into standard asset pricing framework. Jinfan Zhang is currently a PhD candidate in Finance from Yale University. He earned his PhD and B.S. both in Electrical Engineering from Tsinghua University (China). Zhang's research mostly focuses on the institutional origins of asset market liquidity and its impact on asset pricing and financial crisis. Any opinions expressed here are those of the authors and not necessarily those of the FMG. The research findings reported in this paper are the result of the independent research of the authors and do not necessarily reflect the views of the LSE.

Price effects of sovereign debt auctions in the euro-zone: The role of the crisis

“…They also show that the larger the position change, the larger the yield effects. Lou et al (2013) empirically document that yields in the U.S. secondary market increase before auction days and decline again in the days after the auction. The effect is quite large and roughly the same for 2, 5 and 10-year maturities, namely around 2.5 basis points (in a fiveday window around the auction).…”

“…1 Nevertheless, recent empirical research Rosenberg, 2007, andLou, Yan andZhang, 2013) has documented the existence of an 'auction cycle' in treasury bond yields. There is an inverted V-shaped pattern in bond yields around auctions, starting three to five days before the auction.…”

“…They find a small underpricing of treasury auction securities in the order of magnitude of a 1 basis point higher yield. Recent evidence for underpricing of the auctioned bond is given by Lou et al (2013). They provide some statistics 4 on the difference between the auction yield and the on-the-run bond yield on the day of the auction.…”

“…The price effects on bonds with a similar maturity are almost as large, indicating a high degree of substitutability between bonds with similar maturities. The price effect is 3 These numbers are our own calculations based on the data in Tables II and IV in Lou et al (2013).…”

Price Effects of Sovereign Debt Auctions in the Euro-Zone: The Role of the Crisis

“…In an efficient market, one would therefore expect no predictable bond price or yield movements around auctions. 1 Nevertheless, recent empirical research Rosenberg, 2007, andLou, Yan andZhang, 2013) has documented the existence of an 'auction cycle' in treasury bond yields. There is an inverted V-shaped pattern in bond yields around auctions, starting three to five days before the auction.…”