Journal of Finance Vol. 64 No. 1 2009

Are Liquidity and Information Risks Priced in the Treasury Bond Market?

Haitao Li¹; Junbo Wang^2,3; Chunchi Wu^4,5; Yan He^2,6,7,5

¹ University of Michigan–Ann Arbor · ² City University of Hong Kong · ³ University of Arkansas at Fayetteville · ⁴ University of Missouri · ⁵ Singapore Management University · ⁶ Cornell University · ⁷ Indiana University

Abstract

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety of traditional liquidity and informed trading proxies.

DOI

10.1111/j.1540-6261.2008.01439.x

Volume

64

Issue

1

Pages

467-503

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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