Three Essays in Asset Pricing and Investment
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The first essay documents that when Treasury securities go “off the run,” search frictions heighten and matching trades becomes more difficult. This event allows us to isolate the effects of search frictions on market quality and asset pricing. Price impact and the sensitivity of bid-ask spreads to trade size are significantly higher for off-the-runs, which are difficult to explain using models of asymmetric information. High search frictions result in sluggish price adjustment to new information and low informativeness of trades, leading to poor price discovery. Despite these adverse effects on market quality, we find no evidence that search frictions cause segmentation in the Treasury market.