Research

Working Paper
Michael Fleming and Weiling Liu. Working Paper. “Intraday Pricing and Liquidity Effects of U.S. Treasury Auctions”.Abstract
We examine the intraday effects of U.S. Treasury auctions on the pricing and liquidity of the most recently issued 2-, 5-, and 10-year notes.  We find that prices decrease in the hours preceding auction and recover in the hours following auction, a pattern not observed on non-auction days.  The magnitude of the price changes is positively correlated with bid-ask spreads, price impact, price volatility, dispersion of yields around the yield curve, and other measures of financial stress.  We further find that liquidity tends to be better in the hours before an auction, albeit worse at auction time and thereafter, and that liquidity costs loom large in any strategy that seeks to exploit the pattern of intraday price changes.  Our results provide high frequency evidence of Treasury supply shocks leading to price pressure effects and show dealers’ limited risk-bearing capacity helps explain such effects.
Jessica Liu and Weiling Liu. Working Paper. “Regulatory Frictions and Pricing in Long Term Care Insurance”.Abstract
Despite sharply rising prices, the number of companies choosing to operate in the private Long Term Care insurance (LTCI) has dropped from over 100 to roughly 30 today. This paper analyzes how product mispricing and regulators’ stringency jointly affected insurer dropout in the LTCI market. Using novel data on LTCI pricing, we show that regulators’ political climate significantly affected price changes in the LTCI market and, subsequently, insurer profits. We then develop and estimate an infinite-horizon dynamic model of insurance company and regulator interactions. Using the estimated model, we demonstrate how insurer supply and social welfare may be decreasing in regulator stringency when cost shocks are large and asymmetric information exists. However, in most other cases, social welfare is increasing in regulator stringency.
Chris Anderson and Weiling Liu. Working Paper. “The Shadow Price of Intermediary Constraints”.Abstract


    Limits to the risk-taking activities of financial intermediaries are important for understanding market stability as well as asset prices, yet they remain difficult to pin down. We propose a novel measure of intermediary risk constraints called the interdealer broker (IDB) ratio, which is the percent of total trade volume conducted between dealers using an IDB. Theoretically, when aggregate risk constraints tighten, dealers will use IDBs more in order to redistribute idiosyncratic risk. Empirically, we test our measure in the U.S. Treasury market, where we find that the IDB ratio has a 0.72 correlation with interest rate risk, as proxied by Value-at-Risk. Consistent with a story of risk premia, a one standard deviation increase in the IDB ratio forecasts a 1.8 percentage point higher annual excess return on a five-year bond. This return predictability holds across different fixed income classes, over varying maturities, as well as out-of-sample.

2016
Weiling Liu and Emanuel Moench. 2016. “What Predicts U.S. Recessions?” International Journal of Forecasting, 32, 4.Abstract
We reassess the in- and out-of-sample predictability of US recessions at horizons of three months to two years ahead for a large number of previously proposed leading indicator variables, using the Treasury term spread as a benchmark. We estimate both univariate and multivariate probit models, and evaluate the relative model performance based on the receiver operating characteristic (ROC) curve. At the three- and six-month-ahead horizons, various alternative predictor variables increase the accuracy of recession forecasts significantly relative to the term spread, with the annual return on the S&P500 index providing the strongest improvement. While the Treasury term spread is more difficult to outperform systematically at longer horizons, manufacturers’ new orders of capital goods and balances in Broker-Dealer margin accounts increase the precision of recession predictions significantly at horizons of more than one year.