Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-27T14:35:58.791Z Has data issue: false hasContentIssue false
  • English
  • Français

Bond Returns, Liquidity, and Missing Data

Published online by Cambridge University Press:  06 April 2009

Arthur Warga
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines holding period returns to constant duration portfolios of U.S. Government notes and bonds, and measures the return premium generated by liquidity differences in bonds. The approach compares constant duration portfolios constructed in two distinct ways: one using only bonds issued in the most recent Treasury auction, one using all other bonds. Comparisons of the resulting series are made meaningful by choosing narrow duration ranges in the portfolio formation procedure. This, in turn, induces a missing data problem in the created time series. Parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data. It is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 4 , December 1992 , pp. 605 - 617
Copyright
Copyright © School of Business Administration, University of Washington 1992

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y., and Mendelson, H.. “Asset Pricing and the Bid-Ask Spread.” Journal of Financial Economics, 17 (1986), 223–249.CrossRefGoogle Scholar
Azen, S., and Guider, M. Van. “Conclusions Regarding Algorithms for Handling Incomplete Data.” In Proceedings of the Statistical Computing Section. American Statistical Association (1981), 53–56.Google Scholar
Beale, E. M. L., and Little, R. J. A.. “Missing Values in Multivariate Analysis.” Journal of Royal Statistical Society, B37 (1975), 129–146.Google Scholar
Bierwag, G. O. “Duration Analysis: Managing Interest Rate Risk.” Cambridge, MA: Ballinger (1987).Google Scholar
Buck, S. F. “A Method of Estimation of Missing Values in Multivariate Data Suitable for Use with an Electronic Computer.” Journal of Royal Statistical Society, B22 (1960), 302–306.Google Scholar
Dempster, A. P.; Laird, N. M.; and Rubin, D. B.. “Maximum Likelihood Estimation from Incomplete Data via the EM Algorithm.” Journal of Royal Statistical Society, B39 (1977), 1–38.Google Scholar
Fama, E. “Term Premiums in Bond Returns.” Journal of Financial Economics, 13 (12 1984), 529–546.CrossRefGoogle Scholar
Fisher, L. “Determinants of Risk Premiums on Corporate Bonds.” Journal of Political Economy, 67 (06 1959), 217–237.CrossRefGoogle Scholar
Garbade, K. D., and Silber, W. L.. “Price Dispersion in the Government Securities Market.” Journal of Political Economy, 84 (08 1976), 721–740.CrossRefGoogle Scholar
Jordan, J. “Tax Effects in Term Structure Estimation.” Journal of Finance, 39 (06 1984), 393–406.CrossRefGoogle Scholar
Kamara, A. “Liquidity and Short-Term Treasury Yields.” Manuscript, Graduate School of Business Administration, Univ. of Washington (1991).Google Scholar
Little, R. J. A., and Rubin, D. B.. “Statistical Analysis with Missing Data.” New York: John Wiley & Sons (1987).Google Scholar
Macaulay, F. R. “Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields, and Stock Prices in the U.S. since 1856.” New York: National Bureau of Economic Research (1938).Google Scholar
McCulloch, J. H. “The Tax-Adjusted Yield Curve.” Journal of Finance, 30 (06 1975), 811–830.Google Scholar
Orchard, T., and Woodbury, M. A.. “A Missing Information Principle: Theory and Applications.” Proceedings of the 6th Berkeley Symposium on Mathematical Statistics and Probability, 1 (1972), 697–715.Google Scholar
Rao, C. R.Linear Statistical Inference. New York: John Wiley (1972).Google Scholar
Ronn, E. I. “A New Linear Programming Approach to Bond Portfolio Management.” Journal of Financial and Quantitative Analysis, 22 (12 1987), 439–466.CrossRefGoogle Scholar
Schaefer, S. M. “Measuring a Tax Specific Term Structure of Interest Rates in the Market for British Government Securities.” Economic Journal, 91 (06 1981), 415–438.CrossRefGoogle Scholar
Schaefer, S. M. “Tax Induced Clientele Effects in the Market for British Government Securities: Placing Bounds on Security Values in an Incomplete Market.” Journal of Financial Economics, 10 (07 1982), 121–160.CrossRefGoogle Scholar
Sarig, O., and Warga, A.. “Bond Price Data and Bond Market Liquidity.” Journal of Financial and Quantitative Analysis, 24 (09 1989), 367–378.CrossRefGoogle Scholar
Shiller, R. J., and Modigliani, F.. “Coupon and Tax Effects on New and Seasoned Bond Yields and the Measurement of the Cost of Debt Capital.” Journal of Financial Economics, 1 (No. 3, 1979), 297–318.CrossRefGoogle Scholar