The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices
This article examines 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, which are guaranteed by the Treasury. It finds a large liquidity premium in Treasury bonds, which can be more than 15% of the value of some Treasury bonds. This liquidity premium is related to changes in consumer confidence, the amount of Treasury debt available to investors, and flows into equity and money market mutual funds. This suggests that the popularity of Treasury bonds directly affects their value.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Liu, Jun & Longstaff, Francis A, 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
qt48k8f97f, Anderson Graduate School of Management, UCLA.
- Jun Liu, 2004. "Losing Money on Arbitrage: Optimal Dynamic Portfolio Choice in Markets with Arbitrage Opportunities," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 611-641.
- Jordan, Bradford D. & Kuipers, David R., 1997. "Negative option values are possible: The impact of Treasury bond futures on the cash U.S. Treasury market," Journal of Financial Economics, Elsevier, vol. 46(1), pages 67-102, October.
- Kamara, A., 1988. "Trading Structures And Asset Pricing: Evidence From The Treasury Bill Markets," Papers 169, Columbia - Center for Futures Markets.
- Boudoukh, Jacob & Whitelaw, Robert F, 1993. "Liquidity as a Choice Variable: A Lesson from the Japanese Government Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 265-92.
- Bengt Holmstrom & Jean Tirole, 1996.
"Private and Public Supply of Liquidity,"
NBER Working Papers
5817, National Bureau of Economic Research, Inc.
- 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-.
- Bengt Holmstrom & Jean Tirole, 1998.
"LAPM: A Liquidity-based Asset Pricing Model,"
NBER Working Papers
6673, National Bureau of Economic Research, Inc.
- Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
- Gregory R. Duffee, 1996.
"Estimating the price of default risk,"
Finance and Economics Discussion Series
96-29, Board of Governors of the Federal Reserve System (U.S.).
- Jordan, Bradford D. & Jorgensen, Randy D. & Kuipers, David R., 2000. "The relative pricing of U.S. Treasury STRIPS: empirical evidence," Journal of Financial Economics, Elsevier, vol. 56(1), pages 89-123, April.
- Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
- 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.
- Avraham Kamara, 1988. "Market Trading Structures and Asset Pricing: Evidence from the Treasury- Bill Markets," Review of Financial Studies, Society for Financial Studies, vol. 1(4), pages 357-375.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
- 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.
- Holmstrom, Bengt & Tirole, Jean, 1996. "Modeling Aggregate Liquidity," American Economic Review, American Economic Association, vol. 86(2), pages 187-91, May.
- 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.
When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:77:y:2004:i:3:p:511-526. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)
If references are entirely missing, you can add them using this form.