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

60 Pages Posted: 23 Mar 2005

See all articles by Chunchi Wu

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

Dept. of Economics and Finance, City Univ. of HK

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)

Junbo Wang

Dept. of Economics and Finance, City Univ. of HK ( email )

83 Tat Chee Ave., Kowloon Tong
Kowloon Town
Kowloon, 220
Hong Kong
34429492 (Phone)
852-2788-8806 (Fax)

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