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Financial Innovation in an Incomplete Market: An Empirical Study of Stripped Government Bonds

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  • Hiromitsu Kanemasu
  • Robert H. Litzenberger
  • Jacques Rolfo

Abstract

The unbundling of' coupon bonds into pure discount bonds made feasible patterns of dated nominal claims that were not previously attainable. Differences between the market values of coupon bonds and the spanning portfolios of pure discount bonds are consistent with a non-tax related segmentation of the bond market. In most periods, long-maturity coupon bonds selling at a premium could have been profitably unbundled. A comparison of pure discount bond prices with estimates of the respective reservation prices for investors in coupon bonds indicates that long-term time-contingent claims were generally more highly valued once unbundled. The high initial profit from bond stripping and its subsequent decline are consistent with long-run competitive supply adjustments by investment banks. Volatility differences of actual and reservation prices for pure discount bonds are insignificant.

Suggested Citation

  • Hiromitsu Kanemasu & Robert H. Litzenberger & Jacques Rolfo, "undated". "Financial Innovation in an Incomplete Market: An Empirical Study of Stripped Government Bonds," Rodney L. White Center for Financial Research Working Papers 26-86, Wharton School Rodney L. White Center for Financial Research.
    • Handle: RePEc:fth:pennfi:26-86
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    Cited by:

    1. Enrique Schroth, 2002. "Innovation and First-Mover Advantages in Corporate Underwriting: Evidence from Equity Linked Securities," FAME Research Paper Series rp74, International Center for Financial Asset Management and Engineering.

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