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No-arbitrage restrictions and the U.S. Treasury market

Andrea Ajello, Luca Benzoni and Olena Chyruk

Economic Perspectives, 2012, vol. 36, issue Q II, 55-74

Abstract: What is the role of arbitrage trading in the U.S. Treasury market? In this article, the authors discuss the pricing of risk-free Treasury securities via no-arbitrage arguments and illustrate how this approach works in models of the term structure of interest rates. The article ends with an evaluation of market frictions (for example, transaction costs, leverage constraints, and the limited availability of arbitrage capital) in the government debt market and their implications for bond pricing using no-arbitrage term structure models.

Date: 2012
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Handle: RePEc:fip:fedhep:y:2012:i:qii:p:55-74:n:v.36no.2