Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury Strips Program
University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)
Francis A. Longstaff
University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)
Working Paper 1-96
The role that financial innovation and the creation of derivative securities plays in financial markets is one of the most controversial issues in Finance. To provide insight into this role, we examine how market participants use one of the most successful innovations of the past decade, the Treasury STRIPS program. We find that investors use the option to create Treasury-derivative STRIPS primarily to make markets more complete, to take advantage of tax and accounting asymmetries, and to hold portfolios in their most liquid form. Although persistent arbitrage opportunities exist in the STRIPS market, we find no evidence that the option to strip and reconstitute securities is used for speculative or arbitrage-related purposes.
JEL Classification: G10working papers series
Date posted: July 1, 1998
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