Liquidity, Reconstitution, and the Value of U.S. Treasury Strips

Authors

  • PHILLIP R. DAVES,

  • MICHAEL C. EHRHARDT

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    • The University of Tennessee, Department of Finance. The authors appreciate helpful comments made by an anonymous reviewer of this journal. The authors would also like to thank Harold Black, Ray Degennaro, Derrick Herndon, Miles Livingston, Brendan Moynihan, Ron Shrieves, Jim Wansley, and participants of the University of Tennessee Department of Finance Seminar Series for helpful comments.


ABSTRACT

An apparent pricing anomaly exists in the market for U.S. Treasury strips: zero-coupon strips created from principal payments typically trade at significantly higher prices than otherwise identical zero-coupon strips created from coupon payments. In addition to documenting this phenomenon, this study demonstrates that differences in liquidity and differences in reconstitution characteristics explain much of this price variation.

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