Market-Making Costs in Treasury Bills: A Benchmark for the Cost of Liquidity

We focus on market-making costs by examining the daily bid-ask spreads for off-the-run, one-month Treasury bills around two liquidity-changing events. Event one, Salomon Brothers\u27 supply shock, results in a roughly 2.5-basis-point increase in the spread because of an increase in ask prices; and event two, the Long-Term Capital Management demand shock, results in a doubling of the spread because of a decrease in bid prices. Our results provide a benchmark for researchers examining bid-ask spreads of securities that include a liquidity premium, a risk premium, and an asymmetric information premium. (C) 2010 Elsevier B.V. All rights reserved