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No-arbitrage restrictions and the U.S. Treasury market

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  • Andrea Ajello
  • Luca Benzoni
  • Olena Chyruk

Abstract

What is the role of arbitrage trading in the U.S. Treasury market? In this article, the authors discuss the pricing of risk-free Treasury securities via no-arbitrage arguments and illustrate how this approach works in models of the term structure of interest rates. The article ends with an evaluation of market frictions (for example, transaction costs, leverage constraints, and the limited availability of arbitrage capital) in the government debt market and their implications for bond pricing using no-arbitrage term structure models.

Suggested Citation

  • Andrea Ajello & Luca Benzoni & Olena Chyruk, 2012. "No-arbitrage restrictions and the U.S. Treasury market," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II, pages 55-74.
  • Handle: RePEc:fip:fedhep:y:2012:i:qii:p:55-74:n:v.36no.2
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    References listed on IDEAS

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    1. Michael D. Hurd & Susann Rohwedder, 2010. "Effects of the Financial Crisis and Great Recession on American Households," Working Papers WR-810, RAND Corporation.
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    Cited by:

    1. 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.

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