Explaining the On-the-Run Puzzle

Anthony J. Anderson

Howard University - School of Business

Michael S. Long Sr.

Rutgers University at Newark

January 14, 2014

The on-the-run phenomenon is regularly found in the bond markets. The on-the-run phenomenon is the yield difference observed when a new bond issue comes to market from the same issuer and gets a better price (lower yield given equivalent duration) from the market than the older issue. This paper proposes and tests a liquidity model to explain phenomenon using entropy as our liquidity measure. The yield differential results from the illiquidity cost of the older issue that has increased as a result of progressing through stages, which typically occur in an entropy process. We find that a model employing an entropy measure largely explains the on-the-run phenomenon, by accounting for over two-thirds of the liquidity differential for on-the-run corporate bonds.

Number of Pages in PDF File: 43

Keywords: Bonds, liquity, valuation

JEL Classification: G19

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Date posted: February 5, 2014  

Suggested Citation

Anderson, Anthony J. and Long, Michael S., Explaining the On-the-Run Puzzle (January 14, 2014). Available at SSRN: http://ssrn.com/abstract=2388246 or http://dx.doi.org/10.2139/ssrn.2388246

Contact Information

Anthony J. Anderson
Howard University - School of Business ( email )
Washington, DC 20059
United States
Michael S. Long Sr. (Contact Author)
Rutgers University at Newark ( email )
111 Washington Avenue
Newark, NJ 07102
United States
973-353-5471 (Phone)
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