What are Treasury On-Off Spreads Actually?
16 Pages Posted: 7 Aug 2018 Last revised: 13 Aug 2018
Date Written: July 17, 2018
There has never been a thorough analysis of Treasury spline errors. All that is known is the consequence of assumption. Measurement without theory ruffles the waters surrounding theories of liquidity risk in Treasury markets. A central question posited by this paper is: Is the on-off spread actually driven by liquidity differences? All is not lost, however, as we have firm theoretical and empirical support for theories that support past yield changes as a primary driver of on-off spreads.
Keywords: treasury fitting errors, liquidity, inflation risk
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