Monetary Policy and Treasury Risk Premia

41 Pages Posted: 21 Mar 2014  

Andrea Buraschi

The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andrea Carnelli

Imperial College London

Paul Whelan

Copenhagen Business School

Date Written: March 19, 2014

Abstract

This paper investigates the role of monetary policy as a source of time-varying priced risk in bond markets. We use individual agents forecasts of Federal Funds, GDP and inflation to construct an empirical proxy for policy shocks from the residuals of Taylor rule regressions. Key to our analysis is a distinction between (pro-cyclical) target rate shocks and (counter-cyclical) path shocks. We show that path shocks account for between 10% and 15% of the variance of one-year expected excess returns on bonds with maturities 2-5 years and are also priced in the cross-section of equity returns.

Suggested Citation

Buraschi, Andrea and Carnelli, Andrea and Whelan, Paul, Monetary Policy and Treasury Risk Premia (March 19, 2014). Available at SSRN: https://ssrn.com/abstract=2411782 or http://dx.doi.org/10.2139/ssrn.2411782

Andrea Buraschi

The University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)

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

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)

77 Bastwick Street
London, EC1V 3PZ
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

Paper statistics

Downloads
287
Rank
85,548
Abstract Views
1,020