Convenience Yields and Asset Pricing Models

41 Pages Posted: 10 Mar 2022 Last revised: 2 Jun 2023

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; National Bureau of Economic Research (NBER)

Date Written: January 12, 2022

Abstract

Convenience yields on safe assets affect the constraints that asset price data impose on asset pricing models. We show that high Sharpe ratios imply either a volatile stochastic discount factor or a high convenience yield, which generalizes the Hansen-Jagannathan bound. We apply this insight to the Treasury market by incorporating convenience yields into affine term structure models. The solutions link yields across the entire term structure to SDF and convenience yield dynamics. We show that introducing convenience yields rules in more economically sensible models. This improvement becomes more pronounced as we adopt more realistic convenience yield measures.

Keywords: Bond Returns, convenience yields, sharpe ratios, Hansen-Jagannathan bound

Suggested Citation

Jiang, Zhengyang and Richmond, Robert, Convenience Yields and Asset Pricing Models (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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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