60 Pages Posted: 23 Mar 2005
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: 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