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A cointegration study of the efficiency of the US Treasury STRIPS market

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  • James Kung
  • Andrew Carverhill
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    Abstract

    One theoretical implication of cointegration, according to Granger (1986), is that asset prices in an efficient market cannot be cointegrated. Using price data on US Treasury STRIPS with maturities from 2/15/1997 to 8/15/2015, it is found that a set of three STRIPS series is often cointegrated. In addition, by setting up a costless hedge portfolio from three STRIPS with three different maturities, it is found that the hedge portfolio is often stationary and thus arbitrage opportunities are likely to occur. That is, because the hedge portfolio is costless and stationary, cash in can be done when the value of the hedge portfolio is either positive or negative. However, when taking liquidity, tax effects, and transaction costs into consideration, these arbitrage profits would be unlikely. Hence, it is concluded that the US Treasury STRIPS market is efficient.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000329054
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 37 (2005)
    Issue (Month): 6 ()
    Pages: 695-703

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    Handle: RePEc:taf:applec:v:37:y:2005:i:6:p:695-703

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    10. Mark Grinblatt & Francis A. Longstaff, 2000. "Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury STRIPS Program," Journal of Finance, American Finance Association, vol. 55(3), pages 1415-1436, 06.
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