The Decline in Idiosyncratic Values of US Treasury Securities

21 Pages Posted: 24 Aug 2019 Last revised: 3 Aug 2021

See all articles by Miles Livingston

Miles Livingston

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

Yanbin Wu

Emory University - Goizueta Business School; University of Florida - Department of Finance, Insurance and Real Estate

Lei Zhou

Northern Illinois University - Department of Finance

Date Written: August 23, 2019

Abstract

Unique features and market frictions can lead to idiosyncratic pricing for some US Treasury securities. This study uses a linear programming (LP) model to measure aggregate idiosyncratic pricing of T-notes and T-bonds from 1980 to 2016. We document an average idiosyncratic pricing of $0.11 per $100 par, as compared to an average bid-ask spread of $0.08. Further, idiosyncratic pricing declined dramatically from the early 1980s to the 2010s. Empirical evidence suggests that the 1986 Tax Reform Act, increasing issue sizes and improving market liquidity contribute to the decline. At the individual security level, we identify factors contributing to and mitigating idiosyncratic pricing.

Keywords: US Treasuries, Arbitrage, Bond Liquidity

JEL Classification: G12, G14

Suggested Citation

Livingston, Miles B. and Wu, Yanbin and Zhou, Lei, The Decline in Idiosyncratic Values of US Treasury Securities (August 23, 2019). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3441766

Miles B. Livingston (Contact Author)

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)

Yanbin Wu

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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

P.O. Box 117168
Gainesville, FL 32611
United States

Lei Zhou

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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