The Term Structure of Liquidity Premium

58 Pages Posted: 7 Nov 2019 Last revised: 23 Mar 2021

See all articles by Scott Joslin

Scott Joslin

University of Southern California - Department of Finance and Business Economics

Wenhao Li

University of Southern California - Marshall School of Business

Yang Song

University of Washington - Michael G. Foster School of Business

Date Written: March 23, 2021

Abstract

We analyze the term structure of Treasury liquidity premium (LP). Through a model where illiquidity shocks are alleviated by holding Treasuries, we show that LP term structure is shaped by expectations of future market liquidity, liquidity term premium, and Treasury supply. As predicted, the LP term structure is downward-sloping in recessions but upward-sloping in booms, and forward LP predicts future LP and market liquidity. Furthermore, LP is quantitatively important for monetary policy pass-through: LP dampens the pass-through of interest rate policy yet strengthens the pass-through of quantitative easings. We also use LP to infer the term structure of Treasury safety premium.

Keywords: Liquidity Premium, Term Structure, Monetary Policy

Suggested Citation

Joslin, Scott and Li, Wenhao and Song, Yang, The Term Structure of Liquidity Premium (March 23, 2021). USC Marshall School of Business Research Paper, Available at SSRN: https://ssrn.com/abstract=3476730 or http://dx.doi.org/10.2139/ssrn.3476730

Scott Joslin

University of Southern California - Department of Finance and Business Economics ( email )

CA
United States

Wenhao Li (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

HOME PAGE: http://www.wenhao-li.com

Yang Song

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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