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





  • YAN HE

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    • Haitao Li is at the University of Michigan, Junbo Wang is at City University of Hong Kong and University of Arkansas, Chunchi Wu is at Singapore Management University and University of Missouri-Columbia, and Yan He is at Indiana University Southeast. We are very grateful to the Editor, Robert Stambaugh, and an anonymous referee for guidance and very helpful comments. We thank Chris Anderson, Warren Bailey, Michael Brandt, Paul Brockman, Charles Chang, David Easley, Grace Qing Hao, Kenneth Kavajecz, Bill Lesser, Sandra Mortal, David Ng, Maureen O'Hara, Christine Parlour, Paolo Pasquariello, Lubos Pastor, Andy Puckett, Albert Wang, David West, Xuemin Sterling Yan, Kathy Yuan, and seminar participants at Cornell University, City University of Hong Kong, Syracuse University, University of Kansas, University of Missouri at Columbia, and the 2006 American Finance Association Meeting for helpful comments and suggestions. We also thank Lubos Pastor for providing data on the equity market liquidity factor and Ken French for making the Fama–French factor portfolios available on his Web site.


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.