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Financial Innovation and the Role of Derivative Securities: An Empirical Analysis of the Treasury STRIPS Program
Author(s) -
Grinblatt Mark,
Longstaff Francis A.
Publication year - 2000
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00252
Subject(s) - treasury , market liquidity , business , bond , arbitrage , private placement , derivative (finance) , financial system , monetary economics , finance , financial economics , economics , investment banking , archaeology , history
The role that financial innovation plays in financial markets is very controversial. To provide insight into this role, we examine how market participants use the highly successful Treasury STRIPS program. We find that investors use the option to create Treasury‐derivative STRIPS primarily to make markets more complete and take advantage of tax and accounting asymmetries. Although liquidity‐related factors help explain differences in the prices of Treasury bonds and STRIPS, we find little evidence that the option to strip and reconstitute securities is used for speculative or arbitrage‐related purposes.