TY  - JOUR
AU  - Jovanovic,Boyan
AU  - Rousseau,Peter L.
TI  - Liquidity Effects in the Bond Market
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8597
PY  - 2001
Y2  - November 2001
UR  - http://www.nber.org/papers/w8597
L1  - http://www.nber.org/papers/w8597.pdf
N1  - Author contact info:
Boyan Jovanovic
New York University
Department of Economics
19 W. 4th Street, 6th Floor
New York, NY  10012
Tel: 212/998-8953
Fax: 212/995-4186
E-Mail: Boyan.Jovanovic@nyu.edu

Peter L. Rousseau
Department of Economics
Vanderbilt University
VU Station B #351819
2301 Vanderbilt Place
Nashville, TN 37235-1819
Tel: 615/343-2466
E-Mail: peter.l.rousseau@vanderbilt.edu
AB  - Our paper reports the following two findings: 1) In monthly data, bond purchases by the Fed raise bond prices and reduce bond yields.  The residual bond-supply to traders is not fully predictable, and this supply-risk adds between 10 and 40 basis points to the standard deviation of the real interest rate on T-bills. 2) The Fed's open market purchases do not raise stock prices or reduce stock returns.  If anything, they raise stock returns. More generally, bonds and stocks do not co-move at high frequencies. To explain these two facts, we model the bond and stock markets as spatially separate or 'segmented'.  In the model, bond purchases lower bond rates, but they do not affect stock returns, and this is consistent with both facts.
ER  -