Hansen-Jagannathan Bounds with Convenience Yields

26 Pages Posted: 10 Mar 2022 Last revised: 27 Oct 2022

See all articles by Zhengyang Jiang

Zhengyang Jiang

Kellogg School of Management - Department of Finance; National Bureau of Economic Research (NBER)

Robert Richmond

New York University (NYU) - Department of Finance

Date Written: January 12, 2022

Abstract

Short-term Treasury debt has high Sharpe ratios which, 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 then show how 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 Treasury market, and show the introduction of convenience yields greatly improves the fit of affine term structure models.

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=4007377 or http://dx.doi.org/10.2139/ssrn.4007377

Zhengyang Jiang

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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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