No-Arbitrage Restrictions and the U.S. Treasury Market
Federal Reserve Board
Federal Reserve Bank of Chicago - Research Department
Federal Reserve Bank of Chicago
May 24, 2012
Economic Perspectives, Forthcoming
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, G21Accepted Paper Series
Date posted: May 8, 2012 ; Last revised: June 2, 2012
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.406 seconds