The Banking View of Bond Risk Premia

82 Pages Posted: 14 Jan 2020

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

David Alexandre Sraer

University of California, Berkeley; Princeton University

Multiple version iconThere are 3 versions of this paper

Date Written: December 2019

Abstract

Banks' balance-sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations supporting this view, but also discuss several challenges to this interpretation.

Suggested Citation

Haddad, Valentin and Sraer, David Alexandre, The Banking View of Bond Risk Premia (December 2019). CEPR Discussion Paper No. DP14207, Available at SSRN: https://ssrn.com/abstract=3518545

Valentin Haddad (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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David Alexandre Sraer

University of California, Berkeley ( email )

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Berkeley, CA 94720
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Princeton University ( email )

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Princeton, NJ 08544-0708
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