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Failed delivery and daily Treasury bill returns

Author

Listed:
  • Ramon P. DeGennaro
  • James T. Moser

Abstract

If the seller of a Treasury bill does not provide timely and correct delivery instructions to the clearing bank, the bank does not deliver the security. Further, the seller is not paid until this "failed delivery" is rectified. Since the purchase price is not changed, these "fails" generate interest-free loans from the seller to the buyer. ; This paper studies the effect of failed delivery on Treasury-bill prices. We find that investors bid prices to a premium to reflect the possibility of obtaining the interest-free loans that fails represent. This premium is a function of the opportunity cost of the fail. We also find that the bid-ask spread varies directly with the length of the fail. We rule out the possibility that our results are due to liquidity premiums, or to a general weekly pattern in short-term interest rates or the bid-ask spread.

Suggested Citation

  • Ramon P. DeGennaro & James T. Moser, 1990. "Failed delivery and daily Treasury bill returns," Working Paper 9003, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:9003
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    References listed on IDEAS

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    4. Flannery, Mark J & Protopapadakis, Aris A, 1988. " From T-Bills to Common Stocks: Investigating the Generality of Intra-Week Return Seasonality," Journal of Finance, American Finance Association, vol. 43(2), pages 431-450, June.
    5. R. Alton Gilbert, 1989. "Payments system risk: what is it and what will happen if we try to reduce it?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-17.
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    Cited by:

    1. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Sep).
    2. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 204-228, April.

    More about this item

    Keywords

    Treasury bills;

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