cyclical analysis of key us aggregates during a period of macroeconomic stability 1953 1965 the cyclical response patterns of major financial and macroeconomic aggregates to money shocks in the us economy is estimated the data set is limited to the 1953 1965 period the nature of this temporal window is rare in us economic history growth was stable and noninflationary and there was a marked absence of major downturns inflationary expectations and supply shocks these facts permit a more reliable portrayal of the dynamics associated with conventional monetarism than would otherwise be the case instead of a formal structural model the methodology employs a four variable vector autoregression variables are chosen according to the traditional is lm model and include money the index of industrial production the cpi and various interest rates while the method is a theoretical the variables accord with accepted orthodoxy and the results allow theoretically plausible interpretation significant patterns of persistence are found in major macrofinance aggregates over the period money shocks p

arbitrage and the expectations hypothesis this paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete a key implication is that the validity of the expectations hypothesis is purely an empirical issue the expectations hypothesis cannot be ruled out on a priori theoretical grounds one of the oldest and best known models in finance is the expectations hypothesis of the term structure introduced by fisher 1896 more than a century ago the expectations hypothesis has become a standard framework for explaining how yields of different maturities are related and it provides an important empirical benchmark from a theoretical perspective however the expectations hypothesis is not generally viewed as a viable model of the term structure in particular cox ingersoll and ross 1981 show that the traditional expectations hypothesis is actually a set of mutually exclusive propositions and offer a proof that most forms of the expectations hypothesis admit arbitrage recently mcculloch 1993 and fisher and gilles 1998 present counterexamples to the cox et al proof showing that the traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage they acknowledge however that their counterexamples are somewhat contrived and view them as economically implausible these results leave the impression that the expectations hypothesis is only consistent with the absence of arbitrage in pathological cases of little practical interest in this paper we argue that the expectations hypothesis is much more theoretically defensible than commonly believed an important point often overlooked is that the cox et al 1981 results are developed in an economic setting where bonds are redundant securities in the more realistic case where bond prices display security specific variation and there is mounting evidence of this traditional forms of the expectations hypothesis can hold quite generally without arbitrage only weak conditions guaranteeing the existence of an equivalent martingale measure need be satisfied for the various forms of the expectations hypothesis to hold without arbitrage a key

portfolio claustrophobia asset pricing in markets with illiquid assets many classes of assets are illiquid or nonmarketable in that they cannot always be traded immediately thus a portfolio position in these becomes at least tem porarily irreversible we study the asset pricing implications of this type of illiquidity in an exchange economy with heterogeneous agents in this market one asset is always liquid the other asset can be traded initially but then not again until after a blackout period illiquidity has a dramatic effect agents abandon diversification and choose polarized portfolios instead the value of liquidity can represent a large portion of the equilibrium price of an asset jel g11 g12

liquidity maturity and the yields on u s treasury securities the efrect8 of aaaet liquidity on expected retuma for ts with infinite maturities toc ka are eumined for bonda treuury notes and bills with matched maturities of lellll than 6 months the yield to maturity ill higher on notes which have lower liquidity the yield di1ferential between notes and billa is a decreuing and convex function of the time to maturity the results provide a robult confirmation of the liquidity effect in auet 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 1088 due to illiquidity which lowers the asset s value for any given cash flow that the asset generates 1 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 and mendelson 1986 1989 1 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

the relative pricing of u s treasury strips empirical evidence abstract we investigate pricing relations and the potential for arbitrage in the u s treasury strips market stressing the importance of reconciling quoted treasury data with actual market pricing conventions we document that stripping and reconstitution profits in the strips market are fleeting and rarely economically significant that matched maturity principal and coupon strips generally have different prices due at least in part to richness or cheapness in the underlying note or bond and that apparent negative forward rates in the strips market are concentrated in certain long maturity strips that do not actually exist at the time

negative nominal interest rates and the liquidity premium abstract this paper investigates the phenomenon whereby the most recently issued on the run us treasury bond is more heavily traded and thereby accrues a liquidity premium this premium is shown to be related to the time the asset will remain heavily traded and sufficient to cause negative forward nominal interest rates when compared with the prices of similar less liquid bonds

the tips treasury bond puzzle we show that the price of a treasury bond and an inflation swapped treasury inflation protected securities tips issue exactly replicating the cash flows of the treasury bond can differ by more than 20 per 100 notional treasury bonds are almost always overvalued relative to tips total tips treasury mispricing has exceeded 56 billion representing nearly 8 of the total amount of tips outstanding we find direct evidence that the mispricing narrows as additional capital flows into the markets this provides strong support for the slow moving capital explanation of arbitrage persistence

negative option values are possible the impact of treasury bond futures on the cash u s treasury market abstract this paper uses a unique financial instrument in the u s treasury market to study the price behavior of the put option embedded in the november 2009 14 callable u s treasury bond we find that beginning in august 1993 the estimated option value was persistently negative on nearly every day for the ensuing eight months we show that the anomalous pricing behavior arose because the underlying callable bond became the cheapest to deliver issue against u s treasury bond futures contracts hence this paper provides direct evidence that derivative assets can significantly distort pricing in the primary asset market

reserves announcements and interest rates does monetary policy matter the author provides evidence on the perceived existence of strong liquidity effect the analysis is based on the response of the term structure of interest rates to the weekly federal reserve announcements of bank reserves during the post october 1979 period it is shown that unanticipated changes in the mix between borrowed and nonborrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money a precise model is developed and tested during subperiods of nonborrowed and borrowed reserves targeting by the fed

self employment in the eu quality work precarious work or both this paper estimates the differences in earnings between self employed and employees in the eu using the european union statistics on income and living conditions data and quantile regression methods it finds that in both eastern and western europe self employment pays more than regular employment only for workers at the top of the earnings distribution and considerably less than regular employment for those below the median these differences are smaller in eastern europe reflecting lower protection of regular employees this pattern is not driven by low skilled workers and it can be observed in both high skilled and low skilled occupations results are robust to accounting for differences in taxation hours worked and individual unobserved characteristics the evidence provided points to the lack of protective rights for the self employed and low earnings at the beginning of the self employment spells as the main explanations for lower earnings for the majority of self employed

liquidity reconstitution and the value of u s treasury strips an apparent pricing anomaly exists in the market for u s treasury strips zerocoupon strips created from principal payments typically trade at significantly higher prices than otherwise identical zero coupon strips created from coupon payments in addition to documenting this phenomenon this study demonstrates that differences in liquidity and differences in reconstitution characteristics explain much of this price variation u s treasury strips are zero coupon bonds created from either the principal or individual coupons of u s treasury bonds if the maturity date and face value are identical the cash flows for a strip derived from a principal payment are identical to the cash flows for a strip derived from a coupon payment however the two instruments almost always trade at significantly different prices for a recent sample 5 31 91 the mean percentage difference in price is greater than 1 2 with some differences greater than 2 7 this is an apparent anomaly since securities with identical cash flows should trade at the same price although coupon strips and principal strips have identical cash flows at maturity closer inspection reveals two differences the two instruments have different degrees of liquidity and different reconstitution characteristics previous studies have documented the effect of liquidity on prices in other markets amihud and mendelson 1986 1989 find that common stocks with differences in liquidity have significantly different risk adjusted rates of return silber 1991 studies restricted stock offerings and documents substantial price discounts on these illiquid securities vis a vis identical stocks that trade in the open market 1 in a study of u s treasury bills and treasury bonds with remaining maturities of less than six months amihud and mendelson 1991 find that differences in liquidity contribute to differences in prices between matched pairs of bills and bonds of the same

price informativeness and predictability how liquidity can help information asymmetry and liquidity concentration has been widely discussed in literatures this study shows how liquidity influences not only forecasting performances of term structure estimation but also information transmission and price adjustment across markets our analysis helps understanding how extreme market movements affect one another this study examines and provides a rationale for incorporating liquidity in estimating term structure forecasting performance can be greatly enhanced when conditioning on trading liquidity it reduces information asymmetry in the sense of easley and o hara 2004 and burlacu et al 2007 we adopt a time series forecasting model following diebold and li 2006 to compare behaviour of forecasted price errors our findings indicate that forecasted price errors in markets with less depth would influence those with more information asymmetry induces volatile trading first and then price adjustment is transmitted to another market due to insufficient market dep

monetary policy and short term interest rates an efficient markets rational expectations approach this paper is an application of efficient markets rational expectations theory to analyze empirically the relationship of money supply growth and short term interest rates a hotly debated issue in the literature this approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests the empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates the relationship between money supply growth and nominal interest rates is a hotly debated issue in the literature one view associated with keynesian structural macromodels has an increase in money growth leading at least in the short and medium runs to a decline in interest rates 2 an alternative view associated with milton friedman 6 7 indicates that interest rates might rise in response to higher money growth because there is a rise in inflationary expectations and hence a rise in interest rates through a fisher 5 effect

how does liquidity affect government bond yields the paper explores the determinants of yield differentials between sovereign bonds using euro area data there is a common trend in yield differentials which is correlated with a measure of aggregate risk in contrast liquidity differentials display sizeable heterogeneity and no common factor we propose a simple model with endogenous liquidity demand where a bond s liquidity premium depends both on its transaction cost and on investment opportunities the model predicts that yield differentials should increase in both liquidity and risk with an interaction term of the opposite sign testing these predictions on daily data we find that the aggregate risk factor is consistently priced liquidity differentials are priced for a subset of countries and their interaction with the risk factor is in line with the model s prediction and crucial to detect their effect

the on the run liquidity phenomenon abstract we test the implications of a model of multi asset speculative trading in which liquidity differentials between on the run and off the run u s treasury bonds ensue from endowment shocks in the presence of two realistic market frictions information heterogeneity and imperfect competition among informed traders and a public signal our evidence suggests that i off on the run liquidity differentials are economically and statistically significant even after controlling for several of the bonds intrinsic characteristics such as duration convexity repo rates or term premiums and ii off on the run liquidity differentials are smaller immediately following bond auction dates and larger when the uncertainty surrounding the ensuing auction allocations is high when the dispersion of beliefs across informed traders is high and when macroeconomic announcements are noisy consistent with our model

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

monetary policy and short term interest rates new evidence on the liquidity effect abstract there is evidence of a strong liquidity effect in the period october 1979 october 1982 when the federal reserve targeted the growth rate of m 1 and thus monetary surprises were more exogenous than they were in other periods

the impact of money on short term interest rates this study reviews empirical evidence from four research methods related to the impact of money on short term nominal rates the studies consistently fail to find evidence supporting the much hypothesized short term negative relationship between money and nominal rates since at least april 1975 reasons for the absence of a negative relationship include the tendency of financial markets to anticipate corrective action by the fed whenever ml deviates from targeted growth ranges and a rapid adjustment of inflationary expectations to changes in money growth

a reexamination of option values implicit in callable treasury bonds abstract longstaff 1992 and edleson fehr and mason 1993 examine option values implicit in callable treasury bonds and report a significant puzzle implied option values are frequently negative using an alternative approach we reexamine this issue and find that implied option values are generally positive and in contrast to previous studies instances of option values sufficiently negative to overcome the bid ask spread are rare we explain the findings in other studies by showing that the method used may lead to the appearance of a negative option value when the true value is positive