Treasury Bill Yields: Overlooked Information
University of New South Wales (UNSW)
December 31, 2011
This paper considers whether the term structure of Treasury bond yields reflects all risk premium factors that affect their rates of return; that is, whether risk premium factors are spanned the cross-section of Treasury bond yields. The findings reveal that bond risk premiums consist of two factors with different frequencies: long term and short term. The long-term factor raises the slope of a yield curve, has the forecastability horizon of longer than one year, is related to value premiums in the stock market, and predicts macroeconomic growth. In contrast, the short-term factor is completely hidden from Treasury bond yields yet apparently lowers Treasury bill yields, has the forecastability horizon of less than one quarter, is related to stock market returns, and is largely attributed to liquidity premiums.
Number of Pages in PDF File: 45working papers series
Date posted: August 22, 2011 ; Last revised: January 2, 2012
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