We relate market stress to asset pricing by analyzing a large and systematic discrepancy among off-the-run Treasury securities: bond prices traded as much as five percent below otherwise identical notes, orders of magnitude more than we find concurrent special repo rates to explain. The relatively low lending revenue from holding the note begs the question of why its current holders would not trade it for cheaper yet identical cash flows. The pricing discrepancy persisted for months. We find that liquidity characteristics of Treasury securities explain a large share of the Treasury pricing anomaly. We relate insurers’ transactions in Treasuries to their characteristics. We find that the most highly levered insurers and those that transact most frequently tended to demand notes over bonds during the crisis, contributing to the anomaly.
Until recently, all Canadian mutual funds were required to disclose all their individual trades, offering a unique and ideal opportunity to measure and analyze the cost and performance of mutual funds’ trades. We find that active management delivers both cheaper trades and better subsequent performance, and that the dissipative effect of flow-driven transactions costs is primarily through forced sales. Fund size associates with both cheaper trades and better subsequent performance, and a series of trades predicts more price movement in the predicted direction, indicating the value to funds of keeping their trading anonymous.