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Expected Returns in Treasury Bonds

Anna Cieslak

Duke University, Fuqua School of Business

Pavol Povala

Norges Bank Investment Management

January 12, 2015

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.

Number of Pages in PDF File: 60

Keywords: term premia, bond return forecasting factor

JEL Classification: E43, G12

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Date posted: November 15, 2010 ; Last revised: April 2, 2015

Suggested Citation

Cieslak, Anna and Povala, Pavol, Expected Returns in Treasury Bonds (January 12, 2015). Available at SSRN: https://ssrn.com/abstract=1709636 or http://dx.doi.org/10.2139/ssrn.1709636

Contact Information

Anna Cieslak (Contact Author)
Duke University, Fuqua School of Business ( email )
100 Fuqua Drive
Durham, NC 27708-0204
United States
919 660 7879 (Phone)
HOME PAGE: http://https://sites.google.com/site/ancieslak/
Pavol Povala
Norges Bank Investment Management ( email )
Bankplassen 2
P.O. Box 1179 Sentrum
Oslo, NO-0107
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