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Bond Returns, Liquidity, and Missing Data

Arthur Warga
The Journal of Financial and Quantitative Analysis
Vol. 27, No. 4 (Dec., 1992), pp. 605-617
DOI: 10.2307/2331143
Stable URL: http://www.jstor.org/stable/2331143
Page Count: 13
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Bond Returns, Liquidity, and Missing Data
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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.

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