No-Arbitrage Restrictions and the U.S. Treasury Market

20 Pages Posted: 8 May 2012 Last revised: 2 Jun 2012

See all articles by Andrea Ajello

Andrea Ajello

Board of Governors of the Federal Reserve System

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Olena Chyruk

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: May 24, 2012

Abstract

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.

Keywords: No-arbitrage restrictions, U.S. Treasury market, dynamic term structure models, affine models, limits to arbitrage

JEL Classification: G12, E43, G21

Suggested Citation

Ajello, Andrea and Benzoni, Luca and Chyruk, Olena, No-Arbitrage Restrictions and the U.S. Treasury Market (May 24, 2012). Economic Perspectives, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2054114

Andrea Ajello

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://sites.google.com/site/ajelloandrea/

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Olena Chyruk

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
119
Abstract Views
1,462
Rank
326,883
PlumX Metrics