This paper develops an arbitrage-free pricing theory for a term structure of fi xed income securities that incorporates liquidity risk. In our model, there is a quantity impact on the term structure of zero-coupon bond prices from the trading of any single zero-coupon bond. We derive a set of...

This paper estimates term risk premium and expected future spot rates embedded in Treasury forward rates to study the impact of short-term funding shortages on these quantities. Our approach is consistent with dynamic equilibrium models and avoids the arbitrage-free dynamic inconsistency...