Risks and Risk Premia in the US Treasury Market
101 Pages Posted: 13 Jul 2020 Last revised: 6 Dec 2021
Date Written: December 3, 2021
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: Suggested Citation