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

  • Francis A. Longstaff

    (University of California, Los Angeles)

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.

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Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 77 (2004)
Issue (Month): 3 (July)
Pages: 511-526

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Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:3:p:511-526
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  1. Holmstrom, Bengt & Tirole, Jean, 1996. "Modeling Aggregate Liquidity," American Economic Review, American Economic Association, vol. 86(2), pages 187-91, May.
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  6. 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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  8. 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.
  9. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
  10. Duffee, Gregory R, 1999. "Estimating the Price of Default Risk," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 197-226.
  11. 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.
  12. 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.
  13. 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.
  14. 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.
  15. Kamara, A., 1988. "Trading Structures And Asset Pricing: Evidence From The Treasury Bill Markets," Papers 169, Columbia - Center for Futures Markets.
  16. 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.
  17. 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.
  18. 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.
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