Expected Returns in Treasury Bonds
60 Pages Posted: 15 Nov 2010 Last revised: 2 Apr 2015
Date Written: January 12, 2015
Abstract
We study risk premium in US Treasury bonds. We decompose Treasury yields into inflation expectations and maturity-specific interest rate cycles, which we define as variation in yields orthogonal to expected inflation. The short-maturity cycle captures the real short-rate dynamics. Jointly with expected inflation, it comprises the expectations hypothesis (EH) term in the yield curve. Controlling for the EH term, we extract a measure of risk premium variation from yields. The risk premium factor forecasts excess bond returns in and out of sample and subsumes the common bond return predictor obtained as a linear combination of forward rates.
Keywords: term premia, bond return forecasting factor
JEL Classification: E43, G12
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Specification Analysis of Affine Term Structure Models
By Qiang Dai and Kenneth J. Singleton
-
Specification Analysis of Affine Term Structure Models
By Qiang Dai and Kenneth J. Singleton
-
By Andrew Ang and Monika Piazzesi
-
By Andrew Ang and Monika Piazzesi
-
By John H. Cochrane and Monika Piazzesi
-
Expectation Puzzles, Time-Varying Risk Premia, and Dynamic Models of the Term Structure
By Qiang Dai and Kenneth J. Singleton
-
Expectation Puzzles, Time-Varying Risk Premia, and Dynamic Models of the Term Structure
By Qiang Dai and Kenneth J. Singleton
-
Expectation Puzzles, Time-Varying Risk Premia, and Dynamic Models of the Term Structure
By Qiang Dai and Kenneth J. Singleton
-
Expectation Puzzles, Time-Varying Risk Premia, and Dynamic Models of the Term Structure
By Qiang Dai and Kenneth J. Singleton