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Failed delivery and daily Treasury bill returns

Author

Listed:
  • Ramon P. DeGennaro
  • James T. Moser

Abstract

If the seller of a Treasury bill does not provide timely and correct delivery instructions to the clearing bank, the bank does not deliver the security. Further, the seller is not paid until this \"failed delivery\" is rectified. Since the purchase price is not changed, these \"fails\" generate interest-free loans from the seller to the buyer. ; This paper studies the effect of failed delivery on Treasury-bill prices. We find that investors bid prices to a premium to reflect the possibility of obtaining the interest-free loans that fails represent. This premium is a function of the opportunity cost of the fail. We also find that the bid-ask spread varies directly with the length of the fail. We rule out the possibility that our results are due to liquidity premiums, or to a general weekly pattern in short-term interest rates or the bid-ask spread.

Suggested Citation

  • Ramon P. DeGennaro & James T. Moser, 1990. "Failed delivery and daily Treasury bill returns," Working Papers (Old Series) 9003, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:9003
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    References listed on IDEAS

    as
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    7. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
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    10. Gibbons, Michael R & Hess, Patrick, 1981. "Day of the Week Effects and Asset Returns," The Journal of Business, University of Chicago Press, vol. 54(4), pages 579-596, October.
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    Cited by:

    1. Michael J. Fleming & Kenneth D. Garbade, 2005. "Explaining settlement fails," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Sep).
    2. Fleming, Michael J. & Garbade, Kenneth D., 2007. "Dealer behavior in the specials market for US Treasury securities," Journal of Financial Intermediation, Elsevier, vol. 16(2), pages 204-228, April.
    3. Gurrola-Perez, Pedro & He, Jieshuang & Harper, Gary, 2019. "Securities settlement fails network and buy‑in strategies," Bank of England working papers 821, Bank of England.

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