Treasury securities are traded almost around the clock, starting in Tokyo, then moving to London, and then on to New York. Given this market structure, the prices and hence the yields on Treasury securities can readily incorporate economic announcements and other developments when they become known. When financial markets opened later that day in New York, that information had already been incorporated into Treasury yields, although they continued to fall in light of other financial news. Specifically, they focus on the volatility of Treasury yields, that is, the variance of the changes in Treasury yields observed in each market segment.
Previous research indicates that yield volatility exhibits patterns that can be readily modeled.
The intuition for this result is that market developments during the New York trading hours contain important information that continues to affect yield volatilities in the subsequent trading hours. The authors also find that the yield volatilities experienced during the Tokyo and London trading hours spill over into each other but do not have a detectable effect on the volatility experienced during the New York trading hours. Two major reasons for this asymmetry in volatility spillovers are the preponderance of major U.S. economic announcements made during the New York trading hours and the concentration of Treasury investors within the United States. These results suggest that the information generated during the New York trading hours generally has the greatest impact on Treasury yield volatility and on the Treasury market more generally. The major market makers are the 30 primary government securities dealers, who are financial firms that interact directly with the Federal Reserve Bank of New York in the course of the Fed's open market operations.