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Liquidity, Information Risk, and Asset Pricing: Evidence from the U.S. Government Bond Market

60 Pages Posted: 23 Mar 2005  

Chunchi Wu

SUNY at Buffalo - School of Management

Haitao Li

University of Michigan - Stephen M. Ross School of Business; Cheung Kong Graduate School of Business; Cheung Kong Graduate School of Business

Yan He

Indiana University Southeast - School of Business

Junbo Wang

Abstract

We examine the effects of liquidity and information risks on expected returns of U.S. government bonds. Information risk is measured by probability of information-based trading (PIN) derived from the market microstructure model of Easley, Hvidkjaer, and O'Hara (2002). Liquidity risk is captured by sensitivity of individual bond returns to a market-wide liquidity measure along the line of Pastor and Stambaugh (2003). Controlling for systematic risks and bond characteristics, we find that both liquidity and information risks have a significantly positive effect on expected bond returns. Our findings suggest that incorporating microstructure factors into existing term structure models is a promising avenue for improving our understanding of bond price behavior.

Keywords: Information risk, Liquidity risk, PIN, asset pricing, order imbalance

JEL Classification: G12, M41

Suggested Citation

Wu, Chunchi and Li, Haitao and He, Yan and Wang, Junbo, Liquidity, Information Risk, and Asset Pricing: Evidence from the U.S. Government Bond Market. AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=687523 or http://dx.doi.org/10.2139/ssrn.687523

Chunchi Wu (Contact Author)

SUNY at Buffalo - School of Management ( email )

Jacobs Management Center
Buffalo, NY 14222
United States

Haitao Li

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-615-5475 (Phone)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Yan He

Indiana University Southeast - School of Business ( email )

4201 Grant Line Road
New Albany, IN 47150
United States
812-941-2308 (Phone)
812-941-2672 (Fax)

No contact information is available for Junbo Wang

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