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

TLDR

The study empirically investigates how liquidity and information risks affect expected Treasury bond returns. The authors use Pastor and Stambaugh’s systematic liquidity risk measure and the probability of information‑based trading (PIN) to capture liquidity and information risks. They find a robust, positive relationship between Treasury bond returns and both liquidity and information risks, even after controlling for other systematic factors and bond characteristics.

Abstract

ABSTRACT 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.