The Banking View of Bond Risk Premia

Valentin Haddad and David Sraer

Journal of Finance, 2020, vol. 75, issue 5, 2465-2502

Abstract: Banks' balance sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations that support this view, but also discuss several challenges to this interpretation.

Date: 2020
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Citations: View citations in EconPapers (18)

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https://doi.org/10.1111/jofi.12949

Related works:
Working Paper: The Banking View of Bond Risk Premia (2019)
Working Paper: The Banking View of Bond Risk Premia (2019)
Working Paper: The Banking View of Bond Risk Premia (2016)
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