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Expected Returns in Treasury Bonds

Anna Cieslak

Northwestern University - Kellogg School of Management

Pavol Povala

Birkbeck, University of London

January 12, 2015

We study time-varying expected returns in Treasury bonds. We decompose Treasury yields into inflation expectations and maturity-specific interest rate cycles, which we define as the component in yields orthogonal to expected inflation. The short-maturity cycle captures the dynamics of the real short rate at the business cycle frequency. Jointly with expected inflation it comprises the expectations hypothesis (EH) term in the yield curve. Controlling for the EH term allows us to extract a measure of risk premium variation from yields. The risk premium factor varies at a frequency higher than the business cycle and forecasts excess bond returns in and out of sample. It also subsumes the commonly used bond return predictor obtained as a linear combination of forward rates.

Number of Pages in PDF File: 56

Keywords: term premia, bond return forecasting factor

JEL Classification: E32, E44, G12

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Date posted: November 15, 2010 ; Last revised: February 2, 2015

Suggested Citation

Cieslak, Anna and Povala, Pavol, Expected Returns in Treasury Bonds (January 12, 2015). Available at SSRN: http://ssrn.com/abstract=1709636 or http://dx.doi.org/10.2139/ssrn.1709636

Contact Information

Anna Cieslak (Contact Author)
Northwestern University - Kellogg School of Management ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
Pavol Povala
Birkbeck, University of London ( email )
Malet Street
London, WC1E 7HX
United Kingdom
+44 (0) 20 7631 6486 (Phone)
HOME PAGE: http://www.ems.bbk.ac.uk/faculty/povala
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