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

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  • James Kung
  • Andrew Carverhill

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.

Suggested Citation

  • James Kung & Andrew Carverhill, 2005. "A cointegration study of the efficiency of the US Treasury STRIPS market," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 695-703.
  • Handle: RePEc:taf:applec:v:37:y:2005:i:6:p:695-703
    DOI: 10.1080/0003684042000329054
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    References listed on IDEAS

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    Cited by:

    1. Luis Fernando Lanaspa Santolaria & Irene Olloqui Cuartero & Fernando Sanz Garcia, 2012. "Common Trends and Linkages in the US Manufacturing Sector, 1969–2000," International Journal of Urban and Regional Research, Wiley Blackwell, vol. 36(5), pages 1093-1111, September.
    2. Judge, Amrit & Reancharoen, Tipprapa, 2014. "An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 335-358.
    3. repec:eee:phsmap:v:483:y:2017:i:c:p:182-192 is not listed on IDEAS

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