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Liquidity, Taxes, and Short-Term Treasury Yields

Avraham Kamara
The Journal of Financial and Quantitative Analysis
Vol. 29, No. 3 (Sep., 1994), pp. 403-417
DOI: 10.2307/2331337
Stable URL: http://www.jstor.org/stable/2331337
Page Count: 15
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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.
Liquidity, Taxes, and Short-Term Treasury Yields
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Abstract

This article investigates differences in yields on identical Treasury notes and bills and shows that they reflect differences in liquidity (immediacy) risk and taxes. It proposes an empirical measure for differences in the liquidity risk of notes and bills: the volatility of the underlying rate times the ratio of bills' turnover to notes' turnover. Because differential taxes affect sellers but not buyers of bills and notes, the results reject, free of informational problems, the hypothesis that the notes' demand curve is horizontal. Note-bill yield differences also decreases with inventories of notes--the less liquid asset.

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