Consumption Risk and the Cross-Section of Government Bond Returns

72 Pages Posted: 25 Mar 2008 Last revised: 15 Sep 2011

See all articles by Abhay Abhyankar

Abhay Abhyankar

University of Exeter Business School, University of Exeter

Olga Klinkowska

University of Aberdeen - Business School

Soyeon Lee

University of Edinburgh

Date Written: March 1, 2011

Abstract

We use a consumption-based asset pricing model with Epstein-Zin-Weil recursive preferences to explain the cross-section of excess returns on nominal US Treasury bond portfolios. We use a novel approach to extract the model factors from a FAVAR using a large panel; of macro and financial data. We find, over the period 1975-2006, that nominal government bonds are risky assets that pay off in good times characterized by good prospects for future consumption growth. Further, our model explains well the cross-sectional variation in average excess government bond returns, provides plausible estimates of the structural parameter and compares favourably with competing models. estimation methods.

Keywords: Epstein-Zin-Weil preferences, consumption risk, asset pricing tests, government bonds, dynamic factor analysis

JEL Classification: G0, G10, G12

Suggested Citation

Abhyankar, Abhay and Klinkowska, Olga and Lee, Soyeon, Consumption Risk and the Cross-Section of Government Bond Returns (March 1, 2011). Available at SSRN: https://ssrn.com/abstract=1112635 or http://dx.doi.org/10.2139/ssrn.1112635

Abhay Abhyankar (Contact Author)

University of Exeter Business School, University of Exeter ( email )

Streatham Court
Exeter, EX4 4PU
United Kingdom

Olga Klinkowska

University of Aberdeen - Business School ( email )

Edward Wright Building
Aberdeen, Aberdeenshire AB24 3QY
United Kingdom

HOME PAGE: http://www.abdn.ac.uk/~bus067/

Soyeon Lee

University of Edinburgh ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

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