Hostname: page-component-76fb5796d-zzh7m Total loading time: 0 Render date: 2024-04-25T06:56:22.665Z Has data issue: false hasContentIssue false
  • English
  • Français

Risk Premium Information from Treasury-Bill Yields

Published online by Cambridge University Press:  23 January 2018

Jaehoon Lee
Get access Rights & Permissions [Opens in a new window]

Abstract

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 1 , February 2018 , pp. 437 - 454
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

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.

References

Boudoukh, J.; Richardson, M.; and Whitelaw, R. F.. “The Myth of Long-Horizon Predictability.” Review of Financial Studies, 21 (2007), 1577–1605.Google Scholar
Campbell, J. Y., and Shiller, R. J.. “Yield Spreads and Interest Rate Movements: A Bird’s Eye View.” Review of Economic Studies, 58 (1991), 495–514.Google Scholar
Cieslak, A., and Povala, P.. “Expected Returns in Treasury Bonds.” Review of Financial Studies, 28 (2015), 2859–2901.Google Scholar
Cochrane, J. H., and Piazzesi, M.. “Bond Risk Premia.” American Economic Review, 95 (2005), 138–160.Google Scholar
Cox, J. C.; Ingersoll, J. E. J.; and Ross, S. A.. “A Theory of the Term Structure of Interest Rates.” Econometrica, 53 (1985), 385–407.Google Scholar
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), 415–441.CrossRefGoogle Scholar
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), 427–431.Google Scholar
Duffee, G. R.“Idiosyncratic Variation of Treasury Bill Yields.” Journal of Finance, 51 (1996), 527–551.CrossRefGoogle Scholar
Duffee, G. R.“Term Premia and Interest Rate Forecasts in Affine Models.” Journal of Finance, 57 (2002), 405–443.Google Scholar
Duffee, G. R.“Sharpe Ratios in Term Structure Models.” Working Paper, Johns Hopkins University (2010).Google Scholar
Duffee, G. R.“Information in (and Not in) the Term Structure.” Review of Financial Studies, 24 (2011), 2895–2934.Google Scholar
Duffie, D., and Singleton, K. J.. “An Econometric Model of the Term Structure of Interest-Rate Swap Yields.” Journal of Finance, 52 (1997), 1287–1321.Google Scholar
Fama, E. F., and Bliss, R. R.. “The Information in Long-Maturity Forward Rates.” American Economic Review, 77 (1987), 680–692.Google Scholar
Fontaine, J.-S., and Garcia, R.. “Bond Liquidity Premia.” Review of Financial Studies, 25 (2012), 1207–1254.Google Scholar
Grinblatt, M.“An Analytic Solution for Interest Rate Swap Spreads.” International Review of Finance, 2 (2001), 113–149.CrossRefGoogle Scholar
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), 221–233.Google Scholar
Joslin, S.; Priebsch, M.; and Singleton, K. J.. “Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks.” Journal of Finance, 69 (2014), 1197–1233.CrossRefGoogle Scholar
Joslin, S.; Singleton, K. J.; and Zhu, H.. “A New Perspective on Gaussian Dynamic Term Structure Models.” Review of Financial Studies, 24 (2011), 926–970.CrossRefGoogle Scholar
Krishnamurthy, A.“How Debt Markets Have Malfunctioned in the Crisis.” Journal of Economic Perspectives, 24 (2010), 3–28.Google Scholar
Ludvigson, S. C., and Ng, S.. “Macro Factors in Bond Risk Premia.” Review of Financial Studies, 22 (2009), 5027–5067.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
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), 1279–1304.CrossRefGoogle Scholar
Piazzesi, M.“Affine Term Structure Models.” In Handbook of Financial Econometrics, Ait-Sahalia, Y. and Hansen, L., eds. Amsterdam, Netherlands: North-Holland (2003), 691–716.Google Scholar
White, H.“A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar
Supplementary material: File

Lee supplementary material

Lee supplementary material 1

Download Lee supplementary material(File)
File 157.6 KB