Risks and risk premia in the US Treasury market

Junye Li, Lucio Sarno and Gabriele Zinna

Journal of Economic Dynamics and Control, 2024, vol. 158, issue C

Abstract: We analyze the risk-return trade-off in the US Treasury market using a term structure model that features volatility-in-mean effects of multiple sources, and yet preserves tractable bond prices. We find a strong positive relation between risks and risk premia over the 1966-2018 period. While interest-rate risk is the main driver of such positive relation, macro risk plays a non-trivial role, and its omission leads to unstable estimates of the trade-off. Notably, macro risk contributes to the surge and consequent fall of risk premia around the 1980s, whereas it moves inversely with risk premia during the recent ‘low yield’ period.

Keywords: Treasury market; Risk-return trade-off; Term structure models; Bond risk premium; Macro risk (search for similar items in EconPapers)
JEL-codes: C58 E43 G12 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Risks and Risk Premia in the US Treasury Market (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:158:y:2024:i:c:s016518892300194x

DOI: 10.1016/j.jedc.2023.104788

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