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Tax and Liquidity Effects in Pricing Government Bonds

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Author Info
Edwin J. Elton (Stern School of Business, New York University)
T. Clifton Green (Stern School of Business, New York University)
Abstract

Daily data from interdealer government bond brokers are examined for tax and liquidity effects. We use two approaches to create cash flow matching portfolios of similar securities and look for pricing discrepancies associated with liquidity or tax effects. We also look for the presence of tax and liquidity effects by including a liquidity term when fitting a cubic spline to the after-tax yield curve. We find evidence of tax timing options and liquidity effects. However, the effects are much smaller than previously reported and the effects of liquidity are primarily due to high volume bonds with long maturities. Copyright The American Finance Association 1998.

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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 53 (1998)
Issue (Month): 5 (October)
Pages: 1533-1562
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Handle: RePEc:bla:jfinan:v:53:y:1998:i:5:p:1533-1562

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  1. Francisco Alonso & Roberto Blanco & Ana Del Río & Alicia Sanchis, 2004. "Estimating liquidity premia in the Spanish government securities market," European Journal of Finance, Taylor and Francis Journals, vol. 10(6), pages 453-474, December. [Downloadable!] (restricted)
  2. Michael J. Fleming, 2001. "Measuring treasury market liquidity," Staff Reports 133, Federal Reserve Bank of New York. [Downloadable!]
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  3. Landon, Stuart & Smith, Constance, 2008. "Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds," MPRA Paper 9959, University Library of Munich, Germany. [Downloadable!]
  4. Paul Bennett & Kenneth Barbade & John Kambhu, 2000. "Enhancing the liquidity of U.S. Treasury securities in an era of surpluses," Economic Policy Review, Federal Reserve Bank of New York, issue Apr, pages 89-119. [Downloadable!]
  5. David Goldreich & Bernd Hanke & Purnendu Nath, 2005. "The Price of Future Liquidity: Time-Varying Liquidity in the U.S. Treasury Market," Review of Finance, Springer, vol. 9(1), pages 1-32, 03. [Downloadable!] (restricted)
  6. Paul Bennett & Kenneth Garbade & John Kambhu, 1999. "Enhancing the Liquidity of U.S. Treasury Securities in an Era of Surpluses," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-083, New York University, Leonard N. Stern School of Business-. [Downloadable!]
  7. Gordon Delianedis & Robert Geske, 2001. "The Components of Corporate Credit Spreads: Default, Recovery, Tax, Jumps, Liquidity, and Market Factors," University of California at Los Angeles, Anderson Graduate School of Management 1025, Anderson Graduate School of Management, UCLA. [Downloadable!]
  8. Coluzzi, Chiara & Ginebri, Sergio & Turco, Manuel, 2008. "Measuring and Analyzing the Liquidity of the Italian Treasury Security Wholesale Secondary Market," Economics & Statistics Discussion Papers esdp08044, University of Molise, Dept. SEGeS. [Downloadable!]
  9. Michael J. Fleming, 2002. "Are larger Treasury issues more liquid? Evidence from bill reopenings," Staff Reports 145, Federal Reserve Bank of New York. [Downloadable!]
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  10. Gann, Philipp & Laut, Amelie, 2008. "Einflussfaktoren auf den Credit Spread von Unternehmensanleihen," Discussion Papers in Business Administration 4231, University of Munich, Munich School of Management. [Downloadable!]
  11. Heppke-Falk, Kirsten H. & Wolff, Guntram B., 2007. "Moral hazard and bail-out in fiscal federations: evidence for the German Länder," Discussion Paper Series 1: Economic Studies 2007,07, Deutsche Bundesbank, Research Centre. [Downloadable!]
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  12. Margaret Lamb, Andrew Lymer, 1999. "Taxation research in an accounting context: future prospects and interdisciplinary perspectives," European Accounting Review, Taylor and Francis Journals, vol. 8(4), pages 749-776, December. [Downloadable!] (restricted)
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