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Flight-to-liquidity premium (Methods (Regression (Percent change in…
Flight-to-liquidity premium
Data
Two types of zero-coupon bonds
Treasury bonds
Virtually the same risk, maturity, and tax treatment
Coupon on Feb. May Aug. Nov.
Refcorps
Virtually the same risk, maturity, and tax treatment
Coupon on Jan. Apr. Jul. Oct.
75% paid by the Treasury
April 1991 - March 2001
Monthly data
Results
Average liquidity premia range from 9 to 16 basis points
Goals
Find if there are flight-to-liquidity premia
Find possible difference across maturities
Preliminary goal
Calculate liquidity premia to calculate flight-to-liquidity premia
Theory
Standard asset pricing theory
Value of a security should equal the present value of it's cash flows
(cash flows are explicit in the case of bonds)
Maturity of cash flows shouldn't affect asset pricing
Flight-to-liquidity
Some agent prefer holding highly-liquid securities
Theory on liquidity
Public sector tend to provide liquidity to financial market
Multiple studies find a liquidity premium
Intuitions
Only flight-to-liquidity should explain the difference in premia of the two bonds analyzed after controlling for different other effects
Methods
Bloomberg fair value curve to control for
Maturity mismatch
(one month offset)
Difference in maturity
Zero-coupon bonds
Returns are easier to calculate
Regression
Percent change in aggregate amount of funds in money market
Change in foreign holdings of treasury bonds
Consumer Confidence Index
Market value of bonds repurchased by the treasury
Change in BBB-AAA credit spread
Liquidity spread
Percent change in aggregate amount of funds in mutual funds market
Lagged value of liquidity spread
Calculate the liquidity spread across bonds maturity
Liquidity spread
Measurements