Return Generating Process and the Determinants of Term Premiums

43 Pages Posted: 11 Nov 2008

See all articles by Edwin J. Elton

Edwin J. Elton

New York University (NYU) - Department of Finance

Martin J. Gruber

New York University (NYU) - Department of Finance

Jianping Mei

New York University (NYU) - Department of Finance

Date Written: December 1994

Abstract

This paper examines asset pricing theories for treasury bonds using longer maturities than previous studies and employing a simple multi-factor model. We allow bond factor loadings to vary over time according to term structure variables. The model examines not only the time variation in the expected returns of bonds but also their unexpected returns. This allows us to explicitly test some asset pricing restrictions which are difficult to study under existing frameworks. We confirm that the pure expectation theory of the term structure of interest rates is rejected by the data. Our empirical study of a two-factor model finds substantial evidence of time-varying term-premiums and factor loadings. The fact that factor loadings vary with long term interest rates and yield spreads suggest that bond return volatilities are sensitivity to interest rate levels.

Keywords: nonlinear cross-equation restriction, asset pricing, bond returns

Suggested Citation

Elton, Edwin J. and Gruber, Martin J. and Mei, Jianping, Return Generating Process and the Determinants of Term Premiums (December 1994). NYU Working Paper No. FIN-94-029. Available at SSRN: https://ssrn.com/abstract=1299454

Edwin J. Elton (Contact Author)

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0361 (Phone)
212-995-4233 (Fax)

Martin J. Gruber

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Ste 9-190
New York, NY 10012-1126
United States
212-998-0333 (Phone)
212-995-4233 (Fax)

Jianping Mei

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0354 (Phone)
212-995-4221 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
76
Abstract Views
920
rank
310,647
PlumX Metrics