An Inquiry into the Nature and Sources of Variation in the Expected Excess Return of a Long-Term Bond

51 Pages Posted: 29 Apr 2015

See all articles by Gurdip Bakshi

Gurdip Bakshi

Fox School of Business

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management

Xiaohui Gao Bakshi

Fox School of Business, Temple University

Date Written: January 2, 2015

Abstract

This paper proposes an approach to study the expected excess return of a long-term bond and focuses on a lower bound. This lower bound is a crucial number, as it represents the minimum expected excess return demanded by investors. The derived bound is model-independent and can be extracted from options on the 30-year Treasury bond futures. Our implementation reveals that the annualized lower bound ranges from 0.22 to 6.07, with an unconditional average of 1.18%. The ideas and developed results are useful for thinking about cost of debt, allocation between equities and bonds, and measuring investor reaction to monetary policy shocks.

Keywords: Long-term Treasury bond, expected excess return, lower bound, options on bond futures

JEL Classification: E43, E52, E58, G12, G14, G21

Suggested Citation

Bakshi, Gurdip S. and Chabi-Yo, Fousseni and Gao, Xiaohui, An Inquiry into the Nature and Sources of Variation in the Expected Excess Return of a Long-Term Bond (January 2, 2015). Available at SSRN: https://ssrn.com/abstract=2600097 or http://dx.doi.org/10.2139/ssrn.2600097

Gurdip S. Bakshi (Contact Author)

Fox School of Business ( email )

Department of Finance
Philadelphia, PA 19022
United States
215-204-6117 (Phone)
tuk40718@temple.edu (Fax)

HOME PAGE: http://https://sites.google.com/view/gurdipbakshi1

Fousseni Chabi-Yo

University of Massachusetts Amherst - Isenberg School of Management ( email )

Amherst, MA 01003-4910
United States

Xiaohui Gao

Fox School of Business, Temple University ( email )

Philadelphia, PA 19122
United States

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