41 Pages Posted: 21 Mar 2014
Date Written: March 19, 2014
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: 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