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Liquidity, Taxes, and Short-Term Treasury Yields

Published online by Cambridge University Press:  06 April 2009

Avraham Kamara
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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

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