ON A PREFERRED HABITAT FOR LIQUIDITY AT THE TURN-OF-THE-YEAR - EVIDENCE FROM THE TERM-REPO MARKET

In this article, we document a preference for liquidity at the year-en d in the brokered market for general-collateral term-repurchase agreem ents. Our tests indicate significant increases in the repo rates for o ne-week through one-month term instruments when the maturities span th e rum-of-the-year. We show that the results cannot be consistent with window dressing or with the argument that investors in this market til t their portfolios away from riskier assets at the year-end. Our resul ts suggest a generalized liquidity premium at year-end that could also explain the survival of the turn-of-the-year effect in equities. This desire for liquidity could be due to perceived risk, but since it app ears in short-term general-collateral government repos, it seems more likely attributable to year-end payment patterns.