A cointegration study of the efficiency of the US Treasury STRIPS market

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

6 Scopus Citations
View graph of relations

Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)695-703
Journal / PublicationApplied Economics
Volume37
Issue number6
Publication statusPublished - 10 Apr 2005
Externally publishedYes

Abstract

One theoretical implication of cointegration, according to Granger (1986), is that asset prices in an efficient market cannot be cointegrated. Using price data on US Treasury STRIPS with maturities from 2/15/1997 to 8/15/2015, it is found that a set of three STRIPS series is often cointegrated. In addition, by setting up a costless hedge portfolio from three STRIPS with three different maturities, it is found that the hedge portfolio is often stationary and thus arbitrage opportunities are likely to occur. That is, because the hedge portfolio is costless and stationary, cash in can be done when the value of the hedge portfolio is either positive or negative. However, when taking liquidity, tax effects, and transaction costs into consideration, these arbitrage profits would be unlikely. Hence, it is concluded that the US Treasury STRIPS market is efficient. © 2005 Taylor & Francis Group Ltd.