The End of the Month as a Preferred Habitat: A Test of Operational Efficiency in the Money Market

This paper argues that an aggregate preferred habitat for investors exists on (or about) the last day of the calendar month, due to standardizations in the nation's payments system resulting in a concentrated flow of funds on this date. Thus, equilibrium yield discounts are predicted for securities maturing on such dates. Empirical tests on monthly and daily Treasury bill data support the principal hypothesis, as well as several ancillary hypotheses. The results have implications for Treasury debt management, for the short-term cash and debt management practices of businesses and banks, and for the empirical estimation of daily, weekly, or monthly return premiums on risky securities.