Risks and Risk Premia in the US Treasury Market

Junye Li, Lucio Sarno and Gabriele Zinna

No 18592, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

JEL-codes: C58 E43 G12 (search for similar items in EconPapers)
Date: 2023-11
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Journal Article: Risks and risk premia in the US Treasury market (2024)
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