Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury Strips Program

Working Paper 1-96

Posted: 1 Jul 1998

See all articles by Mark Grinblatt

Mark Grinblatt

University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Date Written: January 1996

Abstract

The role that financial innovation and the creation of derivative securities plays in financial markets is one of the most controversial issues in Finance. To provide insight into this role, we examine how market participants use one of the most successful innovations of the past decade, the Treasury STRIPS program. We find that investors use the option to create Treasury-derivative STRIPS primarily to make markets more complete, to take advantage of tax and accounting asymmetries, and to hold portfolios in their most liquid form. Although persistent arbitrage opportunities exist in the STRIPS market, we find no evidence that the option to strip and reconstitute securities is used for speculative or arbitrage-related purposes.

JEL Classification: G10

Suggested Citation

Grinblatt, Mark and Longstaff, Francis A., Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury Strips Program (January 1996). Working Paper 1-96. Available at SSRN: https://ssrn.com/abstract=7374

Mark Grinblatt (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)

Yale University - International Center for Finance

Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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