Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-09T05:36:30.019Z Has data issue: false hasContentIssue false
  • English
  • Français

Liquidity, Taxes, and Short-Term Treasury Yields

Published online by Cambridge University Press:  06 April 2009

Avraham Kamara
Get access Rights & Permissions [Opens in a new window]

Abstract

This article investigates differences in yields on identical Treasury notes and bills and shows that they reflect differences in liquidity (immediacy) risk and taxes. It proposes an empirical measure for differences in the liquidity risk of notes and bills: the volatility of the underlying rate times the ratio of bills' turnover to notes' turnover. Because differential taxes affect sellers but not buyers of bills and notes, the results reject, free of informational problems, the hypothesis that the notes' demand curve is horizonta. Note-bill yield differences also decrease with inventories of notes—the less liquid asset.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 3 , September 1994 , pp. 403 - 417
Copyright
Copyright © School of Business Administration, University of Washington 1994

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y., and Mendelson, H.. “Dealership Market: Market-Making with Inventory.” Journal of Financial Economics, 8 (03 1980), 31–53.CrossRefGoogle Scholar
Amihud, Y.“Liquidity, Maturity and the Yields on U.S. Treasury Securities.” Journal of Finance, 46 (09 1991), 1411–1425.CrossRefGoogle Scholar
Analytical Record of Yields and Yield Spreads. New York, NY: Salomon Brothers, Inc. (1986).Google Scholar
Barclay, M. J., and Litzenberger, R. H.. “Announcements Effects of New Equity Issues and the Use of Intraday Price Data.” Journal of Financial Economics, 21 (05 1988), 71–99.CrossRefGoogle Scholar
Bollenbacher, G. M.The Professional Guide to the U.S. Government Securities Markets. New York, NY: New York Institute of Finance (1988).Google Scholar
Bollerslev, T. “Generalized Autoregressive Conditional Heteroskedasticity.” Journal of Econometrics, 31 (04 1986), 307–327.CrossRefGoogle Scholar
Boudoukh, J., and Whitelaw, R. F.. “Liquidity as a Choice Variable: A Lesson from the Japanese Government Bond Market.” Review of Financial Studies, 6 (2, 1993), 265–292.CrossRefGoogle Scholar
Capozza, D., and Cornell, B.. “Treasury Bill Pricing in the Spot and Futures Market.” Review of Economics and Statistics, 61 (11 1979), 513–520.Google Scholar
Chowdhry, B., and Nanda, V.. “Multi-Market Trading and Market Liquidity.” Review of Financial Studies, 4 (3, 1991), 483–511.CrossRefGoogle Scholar
Constantinides, G. M., and Ingersoll, J. E.. “Optimal Bond Trading with Personal Taxes.” Journal of Financial Economics, 13 (09 1984), 299–335.CrossRefGoogle Scholar
Cornell, B., and Shapiro, A. C.. “The Mispricing of U.S. Treasury Bonds: A Case Study.” Review of Financial Studies, 2 (3, 1989), 297–310.CrossRefGoogle Scholar
CRSP Bond Files Guide. Chicago, IL: Center for Research in Security Prices, Graduate School of Business, Univ. of Chicago (1988).Google Scholar
Federal Reserve Bulletin. Washington, DC: Board of Governors of the Federal Reserve System (1976 through 1984).Google Scholar
Garbade, K. D. “The Effect of Interdealer Brokerage on the Transactional Characteristics of Dealer Markets.” Journal of Business, 51 (07 1978), 477–498.CrossRefGoogle Scholar
Garbade, K. D.Securities Markets. New York, NY: McGraw-Hill (1982).Google Scholar
Garbade, K. D. “Analyzing the Structure of Treasury Yields: Duration, Coupon and Liquidity Effects.” Topics in Money and Security Markets. New York, NY: Bankers Trust Co. (11 1984).Google Scholar
Garbade, K. D., and Rosey, I.. “Secular Variation on the Spread between Bid and Offer Prices on U.S. Treasury Coupon Issues.” Business Economics, 12 (12 1977), 45–49.Google Scholar
Garbade, K. D., and Silber, W. L.. “Price Dispersion in the Government Securities Market.” Journal of Political Economy, 84 (08 1976), 721–740.Google Scholar
Garbade, K. D. “Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk.” Journal of Finance, 34 (06 1979), 577–593.Google Scholar
Grossman, S. J., and Miller, M. H.. “Liquidity and Market Structure.” Journal of Finance, 43 (07 1988), 617–633.CrossRefGoogle Scholar
Hess, A. C., and Frost, P. A.. “Tests for Price Effects of New Issues of Seasoned Securities.” Journal of Finance, 37 (03 1982), 11–25.CrossRefGoogle Scholar
Huizinga, J., and Mishkin, F. S.. “Monetary Policy Regime Shifts and the Unusual Behavior of Real Interest Rates.” Carnegie-Rochester Conference Series on Public Policy, 24 (Spring 1986), 231–274.CrossRefGoogle Scholar
Kamara, A. “Market Trading Structure and Asset Pricing: Evidence from the Treasury Bill Markets.” Review of Financial Studies, 1 (Winter 1988), 357–375.CrossRefGoogle Scholar
Kamara, A. “Liquidity and Short-Term Treasury Yields.” Paper presented at the Western Finance Association Annual Meeting (06 1990).Google Scholar
Lippman, S. A., and McCall, J. J.. “An Operational Measure of Liquidity.” American Economic Review, 76 (03 1986), 43–55.Google Scholar
Litzenberger, R. H., and Rolfo, J.. “Arbitrage Pricing, Transaction Costs and Taxation of Capital Gains.” Journal of Financial Economics, 13 (09 1984), 337–351.CrossRefGoogle Scholar
McCulloch, J. H. “The Tax-Adjusted Yield Curve.” Journal of Finance, 30 (06 1975), 811–830.Google Scholar
McCurdy, C. J. “The Dealer Market for United States Government Securities.” Federal Reserve Bank of New York, Quarterly Review, 2 (Winter 1977–1978), 35–47.Google Scholar
Roley, V. V. “Market Perceptions of U.S. Monetary Policy since 1982.” Federal Reserve Bank of Kansas City, Economic Review, 71 (05 1986), 27–40.Google Scholar
Sarig, O., and Warga, A.. “Bond Price Data and Bond Market Liquidity.” Journal of Financial and Quantitative Analysis, 24 (09 1989), 367–378.CrossRefGoogle Scholar
Schwartz, R. A.Equity Markets: Structure Trading and Performance. New York, NY: Harper and Row (1988).Google Scholar
Stigum, M.The Money Market. Homewood, IL: Dow-Jones Irwin (1983).Google Scholar
Stoll, H. R. “Alternative Views of Market Making.” In Market Making and the Changing Structure of the Securities Industries, Amihud, Y., Ho, T. S. Y., and Schwartz, R. A., eds. Lexington, MA: Lexington Books (1985).Google Scholar
Warga, A. “Bond Returns, Liquidity and Missing Data.” Journal of Financial and Quantitative Analysis, 27 (12 1992), 605–617.Google Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and Direct Test for Heteroskedasticity.” Econometrica, 48 (05 1980), 817–838.CrossRefGoogle Scholar