The Determinants of the Difference Between Bid and Ask Prices on Government Bonds

Tanner, J. Ernest; Kochin, Levis A.

doi:10.1086/295399

Cited by 20 publications

(10 citation statements)

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“…Garbade and Silber (1976) derived the pricing policies of dealers in the government securities market and estimated the determinants of the bid-ask spread. See also Tanner and Kochin (1971) and Garbade and Rosey (1977). distinguishable with different procedures for yield calculation, quotation, and trading, and their quotes are transmitted on different systems.…”

Section: Liquidity and The Us Government Securities Marketmentioning

confidence: 98%

Liquidity, Maturity, and the Yields on U.S. Treasury Securities

Amihud¹,

Mendelson²

1991

The Journal of Finance

296

183

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The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing. THIS PAPER STUDIES EMPIRICALLY the effects of the liquidity of capital assets on their prices. Amihud and Mendelson (1986, 1989) proposed that liquidity affects asset prices because investors require a compensation for bearing transaction costs. Transaction costs-paid whenever the asset is traded-form a sequence of cash outflows. The discounted value of this cost stream proxies for the value loss due to illiquidity, which lowers the asset's value for any given cash flow that the asset generates.' As a result, the return on assets should be an increasing function of their illiquidity (other things equal). For stocks, the illiquidity effect is expected to be strong because their transaction cost sequence is infinite. Amihud and Mendelson (1986, 1989) demonstrated that common stocks with lower liquidity yielded significantly higher average returns, after controlling for risk and for other factors.These results on the importance of liquidity in the pricing of stocks raise additional questions: (i) does the liquidity effect depend on the specific controls used by Amihud andMendelson (1986, 1989)? (ii) does illiquidity have a similarly strong effect on the pricing of bonds, whose maturities are finite? and (iii) if liquidity affects bond yields, how is this effect related to the bond's time to maturity? respectively. This paper was first drafted while the second author was with The William E. Simon Graduate School of Business Administration, University of Rochester, Rochester, NY. The authors thank Kenneth Garbade, William Silber, and an anonymous referee for valuable suggestions and First Boston Corporation for providing the data.'The impact of the cost of transacting on price can be illustrated as follows (Amihud and Mendelson (1988a)): consider a stock which is expected to be traded once a year at a cost of 1 cent on the dollar value; discounting the infinite stream of transaction costs, at say 8%, gives a present value of 12.5 cents per dollar of value, which is the loss due to transaction costs or the discounted cost of illiquidity.

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Section: Liquidity and The Us Government Securities Marketmentioning

confidence: 98%

Liquidity, Maturity, and the Yields on U.S. Treasury Securities

Amihud¹,

Mendelson²

1991

The Journal of Finance

296

183

View full text Add to dashboard Cite

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“…Exceptions include Tanner and Kochin (1971) and Garbade and Rosey (1977), who model Treasury bid-ask spreads, and Amihud and Mendelson (1991), Kamara (1994), and Elton and Green (1998), who explain valuation differences among Treasuries using proxies for liquidity. More recent exceptions, using high frequency data, include Fleming (1997), who documents intraday patterns of bid-ask spreads and trading volume, and Fleming and Remolona (1999) and Balduzzi, Elton, and Green (forthcoming), who analyze spreads and trading volume around economic announcements.…”

Section: Introductionmentioning

confidence: 99%

Measuring Treasury Market Liquidity

2001

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper examines a comprehensive set of liquidity measures for the U.S. Treasury market. The measures are analyzed relative to one another, across securities, and over time. I find highly significant price impact coefficients, such that a simple model that explains price changes with net order flow produces an R 2 statistic above 30% for the two-year note. The price impact coefficients are highly correlated with bid-ask spreads and with episodes of reported poor liquidity (such as the fall 1998 financial markets turmoil). Quote and trade sizes correlate modestly with these episodes and with the other liquidity measures, as do yield spreads between on-the-run and off-the-run securities. In contrast, trading volume and trading frequency are only weakly correlated with these other measures, suggesting that they are poor liquidity proxies. The various measures are positively correlated across securities, almost without exception, especially for Treasury notes. JEL classification: G14

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“…And it is also argued that recently issued bonds undergo a behavioral transformation as they become seasoned bonds. According to this argument there are significant empirical behavioral differences between recently issued bonds and seasoned bonds [4,5,7,9,13].…”

Section: Introductionmentioning

confidence: 99%

Price Spreads, Performance, and the Seasoning of New Treasury and Agency Bond Issues

Bildersee¹

1977

The Journal of Financial and Quantitative Analysis

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The Determinants of the Difference Between Bid and Ask Prices on Government Bonds

Cited by 20 publications

References 0 publications

Liquidity, Maturity, and the Yields on U.S. Treasury Securities

Liquidity, Maturity, and the Yields on U.S. Treasury Securities

Measuring Treasury Market Liquidity

Price Spreads, Performance, and the Seasoning of New Treasury and Agency Bond Issues

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