Abstract

http://ssrn.com/abstract=2403483
 


 



Risk and Return Trade-Off in the U.S. Treasury Market


Eric Ghysels


University of North Carolina Kenan-Flagler Business School; University of North Carolina (UNC) at Chapel Hill - Department of Economics

Anh Le


University of North Carolina Kenan-Flagler Business School

Sunjin Park


University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School

Haoxiang Zhu


Massachusetts Institute of Technology (MIT) - Sloan School of Management

March 1, 2014


Abstract:     
This paper characterizes the risk-return trade-off in the U.S. Treasury market. We propose a discrete-time no-arbitrage term structure model, in which bond prices are solved in closed form and the conditional variances of bond yields are decomposed into a short-run component and a long-run component, each of which follows a GARCH-type process. Estimated using Treasury yields data from January 1962 to August 2007, our model simultaneously matches the conditional volatility dynamics and the deviation from the expectations hypothesis in the data. We find that a higher short-run volatility component of bond yields significantly predicts a higher future excess return, above and beyond the predictive power of the yields. The long-run volatility component does not predict bond excess returns.

Number of Pages in PDF File: 41

Keywords: bond risk premium, stochastic volatility, term structure models

JEL Classification: G12, C58

working papers series


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Date posted: March 3, 2014  

Suggested Citation

Ghysels, Eric and Le, Anh and Park, Sunjin and Zhu, Haoxiang, Risk and Return Trade-Off in the U.S. Treasury Market (March 1, 2014). Available at SSRN: http://ssrn.com/abstract=2403483 or http://dx.doi.org/10.2139/ssrn.2403483

Contact Information

Eric Ghysels
University of North Carolina Kenan-Flagler Business School ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

University of North Carolina (UNC) at Chapel Hill - Department of Economics ( email )
Gardner Hall, CB 3305
Chapel Hill, NC 27599
United States
919-966-5325 (Phone)
919-966-4986 (Fax)
HOME PAGE: http://www.unc.edu/~eghysels/
Anh Le (Contact Author)
University of North Carolina Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States

Sunjin Park
University of North Carolina (UNC) at Chapel Hill - Kenan-Flagler Business School ( email )
McColl Building
Chapel Hill, NC 27599-3490
United States
Haoxiang Zhu
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main Street E62-623
Cambridge, MA 02142
United States
HOME PAGE: http://www.mit.edu/~zhuh
Feedback to SSRN


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