美联储-国债市场深度与流动性脆弱性的关系（英）-2025.2_43页_3mb

Market Depth and Liquidity Fragility in the Treasury Market

Abstract

The paper analyzes liquidity fragility—the risk of sudden liquidity deterioration during adverse shocks—in Treasury markets. It shows that reduced market depth (availability of resting orders) increases fragility because it depends on prompt order book replenishment to maintain low trading costs.

Key Findings

• Liquidity Fragility: While Treasury markets are generally liquid, fragility arises from the potential for rapid deterioration during shocks, amplifying financial system effects.
• Market Depth Impact: Lower depth increases the probability of higher trading costs (price impact) during stress events. Market makers' ability to replenish quotes quickly becomes critical for cost, even if base liquidity is high.
• HMM Results: A Hidden Markov Model (HMM) captures liquidity states. Greater depth decreases the probability of transitioning to worse liquidity states, reducing fragility. Effects are stronger in lower-depth environments.
• Universality: Findings hold for all major benchmark Treasury securities, enabling market-wide fragility analysis. Aggregate market depth also influences systemic liquidity risk.

Conclusion

Market depth significantly affects liquidity fragility; reduced depths indicate higher risks during shocks. These insights inform policy and trading strategies, highlighting depth's role in financial stability.