Risks and Risk Premia in the US Treasury Market

101 Pages Posted: 13 Jul 2020 Last revised: 6 Dec 2021

See all articles by Junye Li

Junye Li

Fudan University - School of Management

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Gabriele Zinna

Bank of Italy

Date Written: December 3, 2021

Abstract

We analyze the risk-return trade-off in the US Treasury market using a term-structure model that features volatility-in-mean effects of multiple sources, and yet preserves tractable bond prices. We find a strong positive relation between risks and risk premia over the 1966-2018 period. While interest-rate risk is the main driver of such positive relation, macro risk plays a non-trivial role, and its omission leads to unstable estimates of the trade-off. Notably, macro risk contributes to the surge and consequent fall of risk premia around the 1980s, whereas it moves inversely with risk premia during the recent `low yield' period.

Keywords: treasury market, risk-return trade-off, term structure models, bond risk premium, macro risk

JEL Classification: G12, C58

Suggested Citation

Li, Junye and Sarno, Lucio and Zinna, Gabriele, Risks and Risk Premia in the US Treasury Market (December 3, 2021). Available at SSRN: https://ssrn.com/abstract=3640341 or http://dx.doi.org/10.2139/ssrn.3640341

Junye Li

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Lucio Sarno

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriele Zinna (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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