Consumption Risk and the Cross-Section of Government Bond Returns
72 Pages Posted: 25 Mar 2008 Last revised: 15 Sep 2011
Date Written: March 1, 2011
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: Suggested Citation