Term Structures of Liquidity Premia in the U.S. Treasury Market

48 Pages Posted: 1 Jun 2010 Last revised: 12 Mar 2011

See all articles by Wolfgang Bühler

Wolfgang Bühler

University of Mannheim - Department of Business Administration and Finance; University of New South Wales, Australian Business School; Financial Research Network (FIRN)

Volker Vonhoff

University of Mannheim - Department of Business Administration and Finance

Date Written: March 10, 2011

Abstract

The issuing policy of the U.S. Treasury allows us to unambiguously isolate maturity-dependent liquidity premia in the Treasury market. We determine and analyze three term structures of liquidity premia obtained from observed yields of coupon STRIPS, observed yields of principal STRIPS, and synthetic yields derived via the bootstrapping of Treasury notes and bonds. Considering liquidity premia between coupon STRIPS and Treasury notes, we surprisingly find that short-term coupon STRIPS are more liquid than Treasury notes whereas long-term coupon STRIPS are less liquid. This structure is highly persistent and can be explained by stripping activity and volume, business uncertainty, and the Fed's monetary policy. In contrast, principal STRIPS do not trade at a significant yield difference relative to Treasury notes. Finally, we provide a liquidity-based explanation for the empirical puzzle that coupon and principal STRIPS with exactly the same cash flows trade at different yields.

Keywords: Bond Liquidity, U.S. Treasury STRIPS, Coupon Stripping, Financial Crisis

JEL Classification: E43, G01, G12

Suggested Citation

Bühler, Wolfgang and Vonhoff, Volker, Term Structures of Liquidity Premia in the U.S. Treasury Market (March 10, 2011). Available at SSRN: https://ssrn.com/abstract=1618357 or http://dx.doi.org/10.2139/ssrn.1618357

Wolfgang Bühler

University of Mannheim - Department of Business Administration and Finance ( email )

D-68131 Mannheim
Germany
+49620368609 (Phone)
+49 6203660729 (Fax)

University of New South Wales, Australian Business School ( email )

Australian Business School
Sydney
Australia
+61-2-9385-54900 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Volker Vonhoff (Contact Author)

University of Mannheim - Department of Business Administration and Finance ( email )

Mannheim, 68131
Germany
+49 621 181-1518 (Phone)
+49 621 181-1519 (Fax)

HOME PAGE: http://finanzierung.bwl.uni-mannheim.de/de/faculty/alumni/vonhoff/

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