Hansen-Jagannathan Bounds with Convenience Yields

21 Pages Posted:

Date Written: January 12, 2022

Abstract

Short-term Treasury debt has high Sharpe ratios and, according to the Hansen-Jagannathan bound, implies a very volatile bond market SDF. In this paper, we show that a small convenience yield on the risk-free asset can rationalize this pattern without requiring a volatile SDF. We further show that, in the presence of convenience yields, the Hansen-Jagannathan bound needs to be generalized as a two-dimensional trade-off between SDF volatility and the convenience yield. We quantify this trade-off in the context of the Treasury market and evaluate the implication of these empirical results for SDF bounds. Assets with low return volatility have Sharpe ratios that are most impacted by convenience yields.

Keywords: Bond Returns, Convenience Yields, Sharpe Ratios, Hansen-Jagannathan Bound

Suggested Citation

Jiang, Zhengyang and Richmond, Robert, Hansen-Jagannathan Bounds with Convenience Yields (January 12, 2022). Available at SSRN: https://ssrn.com/abstract=

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

HOME PAGE: http://sites.google.com/site/jayzedwye/

Robert Richmond (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

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