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Bond Liquidity Premia

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  • Jean-Sébastien Fontaine
  • René Garcia

Abstract

Theory predicts that funding conditions faced by financial intermediaries are an important limit to arbitrage. We identify and measure the value of funding liquidity from the cross-section of Treasury securities. To validate our interpretation, we establish linkages with funding conditions in the repo market, the shadow banking sector, and the overall economy. Looking at asset pricing implications, we find that increases in funding liquidity predict lower risk premia for all Treasury securities but higher risk premia on LIBOR loans, swap contracts, and corporate bonds. The impact of funding conditions on interest rates is large and pervasive throughout crises and normal times. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/rfs/hhr132
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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 25 (2012)
Issue (Month): 4 ()
Pages: 1207-1254

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Handle: RePEc:oup:rfinst:v:25:y:2012:i:4:p:1207-1254

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Cited by:
  1. Carolin E. Pflueger & Luis M. Viceira, 2011. "Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity," NBER Working Papers 16892, National Bureau of Economic Research, Inc.
  2. Kees E. Bouwman & Elvira Sojli & Wing Wah Tham, 2012. "Aggregate Stock Market Illiquidity and Bond Risk Premia," Tinbergen Institute Discussion Papers 12-140/IV/DSF46, Tinbergen Institute.
  3. repec:dgr:uvatin:2012140 is not listed on IDEAS
  4. Marco Taboga, 2013. "What is a prime bank? A Euribor – OIS spread perspective," Temi di discussione (Economic working papers) 895, Bank of Italy, Economic Research and International Relations Area.
  5. Alain Monfort & Jean-Paul Renne, 2010. "Default, Liquidity and Crises : An Econometric Framework," Working Papers 2010-46, Centre de Recherche en Economie et Statistique.
  6. Monfort, A. & Renne, J-P., 2011. "Credit and liquidity risks in euro area sovereign yield curves," Working papers 352, Banque de France.
  7. D'Amico, Stefania & Fan, Roger & Kitzul, Yuriy, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.
  8. Dahlquist, Magnus & Hasseltoft, Henrik, 2013. "International Bond Risk Premia," Journal of International Economics, Elsevier, vol. 90(1), pages 17-32.
  9. Dudek, Jérémy, 2013. "Illiquidité, contagion et risque systémique," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/13236 edited by Le Fol, Gaëlle.
  10. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers 13-05 [rev.], University of Cologne, Centre for Financial Research (CFR).
  11. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2013. "Mortgage Hedging in Fixed Income Markets," FMG Discussion Papers dp722, Financial Markets Group.
  12. Fang, Jieyan & Kempf, Alexander & Trapp, Monika, 2014. "Fund Manager Allocation," Journal of Financial Economics, Elsevier, vol. 111(3), pages 661-674.
  13. Schuster, Philipp & Trapp, Monika & Uhrig-Homburg, Marliese, 2013. "A heterogeneous agents equilibrium model for the term structure of bond market liquidity," CFR Working Papers 13-05, University of Cologne, Centre for Financial Research (CFR).

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