Skewness Risk and Bond Prices

Francisco Ruge-Murcia

Cahiers de recherche from Universite de Montreal, Departement de sciences economiques

Abstract: Statistical evidence is reported that even outside disaster periods, agents face negative consumption skewness, as well as positive inflation skewness. Quantitative implications of skewness risk for nominal loan contracts in a pure exchange economy are derived. Key modeling assumptions are Epstein-Zin preferences for traders and asymmetric distributions for consumption and inflation innovations. The model is solved using a third-order perturbation and estimated by the simulated method of moments. Results show that skewness risk accounts for 6 to 7 percent of the risk premia depending on the bond maturity.

Keywords: Term structure of interest rates; bond premia, nonlinear dynamic models; simulated method of moments. (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2012
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Citations: View citations in EconPapers (1)

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http://hdl.handle.net/1866/8860 (application/pdf)

Related works:
Journal Article: Skewness Risk and Bond Prices (2017)
Working Paper: Skewness Risk and Bond Prices (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:2012-14

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