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

  • Francis A. Longstaff

We examine 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. We find a large liquidity premium in Treasury bonds, which can be more than fifteen percent 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 a.ects their value.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9312.

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Date of creation: Nov 2002
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Publication status: published as Longstaff, Francis A. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices." Journal of Business 77, 3 (July 2004): 511-26.
Handle: RePEc:nbr:nberwo:9312
Note: AP
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  1. 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.
  2. Woodford, Michael, 1990. "Public Debt as Private Liquidity," American Economic Review, American Economic Association, vol. 80(2), pages 382-88, May.
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  6. Kamara, A., 1988. "Trading Structures And Asset Pricing: Evidence From The Treasury Bill Markets," Papers 169, Columbia - Center for Futures Markets.
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  8. 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.
  9. 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.
  10. 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.
  11. Duffee, Gregory R, 1999. "Estimating the Price of Default Risk," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 197-226.
  12. 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.
  13. Bengt Holmstrom & Jean Tirole, 1998. "LAPM: A Liquidity-based Asset Pricing Model," NBER Working Papers 6673, National Bureau of Economic Research, Inc.
  14. 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.
  15. 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.
  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. 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.
  18. 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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