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

James Kung and Andrew Carverhill

Applied Economics, 2005, vol. 37, issue 6, 695-703

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.

Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/0003684042000329054 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:37:y:2005:i:6:p:695-703

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/0003684042000329054

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().