Abstract

http://ssrn.com/abstract=2054114
 
 

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No-Arbitrage Restrictions and the U.S. Treasury Market


Andrea Ajello


Federal Reserve Board

Luca Benzoni


Federal Reserve Bank of Chicago - Research Department

Olena Chyruk


Federal Reserve Bank of Chicago

May 24, 2012

Economic Perspectives, Forthcoming

Abstract:     
What is the role of arbitrage trading in the U.S. Treasury market? We discuss the pricing of risk-free Treasury securities via no-arbitrage arguments and illustrate how this approach works in models of the term structure of interest rates. The article continues with an evaluation of market frictions (for example, transaction costs, leverage constraints, and the limited availability of arbitrage capital) in the government debt market. We conclude with a discussion on the implications of such frictions for monetary policy and the pricing of bonds using no-arbitrage term structure models.

Number of Pages in PDF File: 20

Keywords: No-arbitrage restrictions, U.S. Treasury market, dynamic term structure models, affine models, limits to arbitrage

JEL Classification: G12, E43, G21

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Date posted: May 8, 2012 ; Last revised: June 2, 2012

Suggested Citation

Ajello, Andrea and Benzoni, Luca and Chyruk, Olena, No-Arbitrage Restrictions and the U.S. Treasury Market (May 24, 2012). Economic Perspectives, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2054114

Contact Information

Andrea Ajello
Federal Reserve Board ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
HOME PAGE: http://sites.google.com/site/ajelloandrea/
Luca Benzoni (Contact Author)
Federal Reserve Bank of Chicago - Research Department ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)
HOME PAGE: http://lbenzoni.frbchi.googlepages.com/
Olena Chyruk
Federal Reserve Bank of Chicago ( email )
230 South LaSalle Street
Chicago, IL 60604
United States
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