The Determinants of Treasury Bond Stripping Level

49 Pages Posted: 22 Aug 2011

See all articles by Marck Bulter

Marck Bulter

Dutch Central Bank (DNB)

Miles Livingston

University of Florida - Department of Finance, Insurance and Real Estate

Lei Zhou

Northern Illinois University - Department of Finance

Date Written: August 19, 2011

Abstract

Several explanations of Treasury bond stripping have been proposed including interest rate risk management, taxes, and market completion. Our findings suggest that stripping is affected by each of these factors. First, we find that higher coupon and longer maturity Treasury bonds are more heavily stripped, consistent with the Interest Rate Risk and Tax hypotheses. Second, large gaps in the maturity spectrum of Treasury bonds induce stripping, in support of the Market Completion hypothesis. Third, the percent of individual bonds held as strips decreases when the yield curve is significantly inverted, consistent with the Tax hypothesis. Finally, patterns of coupon rates on adjacent maturity issues of Treasuries also have an impact on Treasury bond stripping.

Suggested Citation

Bulter, Marck and Livingston, Miles B. and Zhou, Lei, The Determinants of Treasury Bond Stripping Level (August 19, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1912650 or http://dx.doi.org/10.2139/ssrn.1912650

Marck Bulter

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Miles B. Livingston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainsville, FL 32611-7168
United States
352-392-4316 (Phone)
352-392-0301 (Fax)

Lei Zhou (Contact Author)

Northern Illinois University - Department of Finance ( email )

Wirtz Hall
DeKalb, IL 60115
United States
815-753-1115 (Phone)
815-753-0504 (Fax)

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