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Convenience Yields in On-the-run Treasuries: Theory and Evidence

Опубликовано на портале: 22-06-2006
Тематические разделы:
The convenience yield differential between on- and off-the-run Treasury securities with identical maturities has two components. A non-cyclical component may arise due to the higher illiquidity of off-the-run bonds. Also, trading in the market for the next issue often causes cyclical shortages of the on-the-runs. When this occurs, owners of the on-the-run bond can earn riskless profits by borrowing money at the special repo rate and lending money at the prevailing risk free market rate. This second component of the convenience yield, induced by the auction, is cyclical. Autors first show that special repo rates and the convenience yield are jointly cyclical over the auction cycle. The patterns are statistically significant and pervasive across bonds and auctions. Repo specials are highest around the announcement date and disappear by the issue date. The off-minus on-the-run yield spread is highest at the beginning of the cycle and collapses near its end. This is consistent with a decreasing present value of profits over a decreasing horizon. We then develop a no-arbitrage continuous-time model, with stochastic interest and special repo rates, that prices the on-the-run bonds that command this convenience yield. A simple implementation of the model generates yields consistent with the evidence.

Ссылки
перснальной страничке автора, Robert A. Jarrow, можно найти полный текст статьи
формате pdf:
http://www.johnson.cornell.edu/faculty/profiles/Jarrow/
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