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 23, 2012
Economic Perspectives, Vol. XXXVI, No. 2, p. 55, 2012
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, Asset Pricing, Trading volume, Bond Interest Rates, Interest Rates: Determination, Term Structure, and Effects, Banks, Other Depository Institutions, Micro Finance Institutions
JEL Classification: G12, G21Accepted Paper Series
Date posted: July 17, 2012 ; Last revised: July 20, 2012
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