Bond liquidity premia

Arbeitspapier

Recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries. In the US, the repo market is the key funding market. Then, the premium of on-the-run U.S. Treasury bonds should share a common component with risk premia in other markets. This observation leads to the following identification strategy. We measure the value of funding liquidity from the cross-section of on-the-run premia by adding a liquidity factor to an arbitrage-free term structure model. As predicted, we find that funding liquidity explains the cross-section of risk premia. An increase in the value of liquidity predicts lower risk premia for on-the-run and off-the-run bonds but higher risk premia on LIBOR loans, swap contracts and corporate bonds. Moreover, the impact is large and pervasive through crisis and normal times. We check the interpretation of the liquidity factor. It varies with transaction costs, S&P500 valuation ratios and aggregate uncertainty. More importantly, the liquidity factor varies with narrow measures of monetary aggregates and measures of bank reserves. Overall, the results suggest that different securities serve, in part, and to varying degrees, to fulfill investors' uncertain future needs for cash depending on the ability of intermediaries to provide immediacy.

Angaben zum Objekt

• Sprache: Englisch

Verweise und Beziehungen

• Erschienen in: Series: Bank of Canada Working Paper ; No. 2009-28

Klassifikation und Themen

• Klassifikation: Wirtschaft ; Interest Rates: Determination, Term Structure, and Effects ; Crisis Management
• Thema: Financial markets ; Financial stability ; Finanzmarkt ; Wertpapierhandel ; Pensionsgeschäft ; Risikoprämie ; Capital Asset Pricing Model ; USA

Beteiligte, Orts- und Zeitangaben

• Ereignis: Geistige Schöpfung
• (wer): Fontaine, Jean-Sébastien ; Garcia, René
• Ereignis: Veröffentlichung
• (wer): Bank of Canada
• (wo): Ottawa
• (wann): 2009

Weitere Informationen

• DOI: doi:10.34989/swp-2009-28
• Handle: http://hdl.handle.net/10419/53854
• Letzte Aktualisierung: 20.09.2024, 08:21 MESZ