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The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices

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Author Info
Francis Longstaff (Anderson School of Management)
Abstract

We examine whether there is a flight-to-liquidity premium in Treasury bond prices by comparing them with prices of bonds issued by Refcorp, a U.S. Government agency. Since Refcorp bonds are, in effect, guaranteed by the Treasury, they have the same credit as Treasury bonds. We find a large liquidity premium in Treasury bonds, which can be more than fifteen percent of the value of some Treasury bonds. We find strong evidence that this liquidity premium is related to changes in consumer con- fidence, flows into equity and money market mutual funds, and changes in foreign ownership of Treasury debt. This suggests that the popularity of Treasury bonds directly affects their value

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1004.

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Date of creation: 01 May 2001
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Handle: RePEc:cdl:anderf:1004

Note: oai:cdlib1:anderson/fin-1004
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  1. Menachem Brenner & Rafi Eldor & Shmuel Hauser, 1999. "The Price of Options Illiquidity," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-086, New York University, Leonard N. Stern School of Business-. [Downloadable!]
    Other versions:
  2. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February. [Downloadable!] (restricted)
    Other versions:
  3. Longstaff, Francis A, 1995. " How Much Can Marketability Affect Security Values?," Journal of Finance, American Finance Association, vol. 50(5), pages 1767-74, December. [Downloadable!] (restricted)
  4. Kamara, A., 1988. "Trading Structures And Asset Pricing: Evidence From The Treasury Bill Markets," Papers 169, Columbia - Center for Futures Markets.
  5. Jun Liu & Francis Longstaff & Ravit Mandell, 2000. "The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads," University of California at Los Angeles, Anderson Graduate School of Management 1076, Anderson Graduate School of Management, UCLA. [Downloadable!]
  6. Jun Liu & Francis Longstaff, 2000. "Losing Money on Arbitrages: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities," University of California at Los Angeles, Anderson Graduate School of Management 1054, Anderson Graduate School of Management, UCLA. [Downloadable!]
  7. Holmstrom, Bengt & Tirole, Jean, 1996. "Modeling Aggregate Liquidity," American Economic Review, American Economic Association, vol. 86(2), pages 187-91, May. [Downloadable!] (restricted)
  8. Avraham Kamara, 1988. "Market Trading Structures and Asset Pricing: Evidence from the Treasury- Bill Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 1(4), pages 357-375. [Downloadable!] (restricted)
  9. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  10. Bengt Holmstrom & Jean Tirole, 1998. "LAPM: A Liquidity Based Asset Pricing Model," Working papers 98-8, Massachusetts Institute of Technology (MIT), Department of Economics.
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  11. Duffee, Gregory R, 1999. "Estimating the Price of Default Risk," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(1), pages 197-226.
  12. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 687-720.
  13. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June. [Downloadable!] (restricted)
  14. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April. [Downloadable!] (restricted)
  15. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23. [Downloadable!]
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  16. 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. [Downloadable!] (restricted)
  17. Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, vol. 58(3), pages 397-415, December. [Downloadable!] (restricted)
  18. Lippman, Steven A & McCall, John J, 1986. "An Operational Measure of Liquidity," American Economic Review, American Economic Association, vol. 76(1), pages 43-55, March.
  19. Boudoukh, Jacob & Whitelaw, Robert F, 1993. "Liquidity as a Choice Variable: A Lesson from the Japanese Government Bond Market," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(2), pages 265-92. [Downloadable!] (restricted)
  20. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May. [Downloadable!] (restricted)
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