Monetary Policy and Treasury Risk Premia

Posted: 20 Mar 2012 Last revised: 14 Feb 2013

See all articles by Andrea Buraschi

Andrea Buraschi

Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andrea Carnelli

Imperial College London

Paul Whelan

Copenhagen Business School

Date Written: January 25, 2012

Abstract

This paper studies the properties of bond risk premia in an economy with recursive preferences, long run risks, and monetary policy. The solution for bond yields is quadratic and monetary policy shocks command a time varying price of risk. An empirical proxy of monetary policy shocks is obtained from the residuals of panel regressions estimated over an extensive survey of Federal funds, gdp and inflation forecasts. The analysis shows that monetary policy shocks predict future bond returns in an economically and significant way: univariate regressions for bond maturities of 2 years reveal that monetary policy shocks account for 16% of the time variation in realized returns. Excluding the last financial crisis from the sample significantly strengthens the results, which we interpret as a consequence of constraints imposed by the zero-bound.

Keywords: monetary policy, FOMC, fixed income, volatility, trade, uncertainty

JEL Classification: D9, E3, E4, G12

Suggested Citation

Buraschi, Andrea and Carnelli, Andrea and Whelan, Paul, Monetary Policy and Treasury Risk Premia (January 25, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2024470 or http://dx.doi.org/10.2139/ssrn.2024470

Andrea Buraschi

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Andrea Carnelli

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Paul Whelan (Contact Author)

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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