Conditional Time-Varying Interest Rate Risk Premium: Evidence from the Treasury Bill Futures Market

Posted: 16 Aug 2005

See all articles by Alan C. Hess

Alan C. Hess

University of Washington - Michael G. Foster School of Business

Avraham Kamara

University of Washington - Michael G. Foster School of Business

Abstract

Existing studies of the term structure of interest rates often use spot Treasury rates to represent default-free interest rates. However, part of the premium in Treasury rates is compensation for the risk that short-sellers may default. Since Treasury bill futures are default-free they provide cleaner data to estimate the interest rate risk premium. The mean excess return in default-free Treasury bill futures is zero. This suggests that the interest rate risk premium could be economically negligible. We find that although the mean unconditional premium is zero, futures returns contain economically and statistically significant time varying conditional interest rate risk premiums. The conditional premium depends significantly positively on its own conditional variance and its conditional covariance with the equity premium. The conditional premium is large in the volatile 1979-1982 period, but small afterwards.

Keywords: Term Structure, Treasury bill forward and futures rates, time varying conditional term premium

JEL Classification: E43, G12, G13

Suggested Citation

Hess, Alan C. and Kamara, Avraham, Conditional Time-Varying Interest Rate Risk Premium: Evidence from the Treasury Bill Futures Market. Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=774524

Alan C. Hess (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543 4579 (Phone)
206-543-6809 (Fax)

Avraham Kamara

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-0652 (Phone)
206-221-6856 (Fax)

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