Skip to main content

Risk Premium Information from Treasury-Bill Yields

  • Jaehoon Lee

I find that short-maturity Treasury-bill yields have unique information about risk premiums that is not spanned by long-maturity Treasury-bond yields. I estimate 2 components of risk premiums: long term and short term. The long-term component steepens the slope of yield curves and has a forecastability horizon of longer than 1 year. In contrast, the short-term component affects Treasury-bill yields but is almost invisible from Treasury bonds, has a forecastability horizon of less than 1 quarter, and is related to bond liquidity premiums.

Corresponding author
* Lee (corresponding author),, University of New South Wales Business School.
Hide All

I am very grateful to Gregory Duffee (the referee) and Paul Malatesta (the editor) for helpful suggestions, and to Timothy Johnson, Neil Pearson, and George Pennacchi for their guidance throughout my PhD program. I also thank Geert Bekaert, Michael Imerman, Robert Kimmel, Andrea Lu, Kwangwoo Park, and the seminar participants at the University of Illinois at Urbana–Champaign; University of Technology, Sydney; Korea Advanced Institute of Science and Technology; Korea University; and Yonsei University.

Hide All
Boudoukh J.; Richardson M.; and Whitelaw R. F.. “The Myth of Long-Horizon Predictability.” Review of Financial Studies, 21 (2007), 15771605.
Campbell J. Y., and Shiller R. J.. “Yield Spreads and Interest Rate Movements: A Bird’s Eye View.” Review of Economic Studies, 58 (1991), 495514.
Cieslak A., and Povala P.. “Expected Returns in Treasury Bonds.” Review of Financial Studies, 28 (2015), 28592901.
Cochrane J. H., and Piazzesi M.. “Bond Risk Premia.” American Economic Review, 95 (2005), 138160.
Cox J. C.; Ingersoll J. E. J.; and Ross S. A.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (1985), 385407.
Dai Q., and Singleton K. J.. “Expectation Puzzles, Time-Varying Risk Premia, and Affine Models of the Term Structure.” Journal of Financial Economics, 63 (2002), 415441.
Dickey D. A., and Fuller W. A.. “Distribution of the Estimators for Autoregressive Time Series with a Unit Root.” Journal of the American Statistical Association, 74 (1979), 427431.
Duffee G. R.Idiosyncratic Variation of Treasury Bill Yields.” Journal of Finance, 51 (1996), 527551.
Duffee G. R.Term Premia and Interest Rate Forecasts in Affine Models.” Journal of Finance, 57 (2002), 405443.
Duffee G. R.“Sharpe Ratios in Term Structure Models.” Working Paper, Johns Hopkins University (2010).
Duffee G. R.Information in (and Not in) the Term Structure.” Review of Financial Studies, 24 (2011), 28952934.
Duffie D., and Singleton K. J.. “An Econometric Model of the Term Structure of Interest-Rate Swap Yields.” Journal of Finance, 52 (1997), 12871321.
Fama E. F., and Bliss R. R.. “The Information in Long-Maturity Forward Rates.” American Economic Review, 77 (1987), 680692.
Fontaine J.-S., and Garcia R.. “Bond Liquidity Premia.” Review of Financial Studies, 25 (2012), 12071254.
Grinblatt M.An Analytic Solution for Interest Rate Swap Spreads.” International Review of Finance, 2 (2001), 113149.
Huber P. J.The Behavior of Maximum Likelihood Estimates under Nonstandard Conditions.” In Proceedings of the Fifth Berkeley Symposium on Mathematical Statistics and Probability (1967), 221233.
Joslin S.; Priebsch M.; and Singleton K. J.. “Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks.” Journal of Finance, 69 (2014), 11971233.
Joslin S.; Singleton K. J.; and Zhu H.. “A New Perspective on Gaussian Dynamic Term Structure Models.” Review of Financial Studies, 24 (2011), 926970.
Krishnamurthy A.How Debt Markets Have Malfunctioned in the Crisis.” Journal of Economic Perspectives, 24 (2010), 328.
Ludvigson S. C., and Ng S.. “Macro Factors in Bond Risk Premia.” Review of Financial Studies, 22 (2009), 50275067.
Newey W. K., and West K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.
Pearson N. D., and Sun T.-S.. “Exploiting the Conditional Density in Estimating the Term Structure: An Application to the Cox, Ingersoll, and Ross Model.” Journal of Finance, 49 (1994), 12791304.
Piazzesi M.Affine Term Structure Models.” In Handbook of Financial Econometrics, Ait-Sahalia Y. and Hansen L., eds. Amsterdam, Netherlands: North-Holland (2003), 691716.
White H.A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817838.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Journal of Financial and Quantitative Analysis
  • ISSN: 0022-1090
  • EISSN: 1756-6916
  • URL: /core/journals/journal-of-financial-and-quantitative-analysis
Please enter your name
Please enter a valid email address
Who would you like to send this to? *
Type Description Title
Supplementary materials

Lee supplementary material
Lee supplementary material 1

 Unknown (158 KB)
158 KB


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 21 *
Loading metrics...

Abstract views

Total abstract views: 113 *
Loading metrics...

* Views captured on Cambridge Core between 23rd January 2018 - 21st February 2018. This data will be updated every 24 hours.