The Banking View of Bond Risk Premia

David Sraer and Valentin Haddad
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Valentin Haddad: Princeton University

No 814, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: Banks’ exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with a bank-centric view of the market for interest rate risk. Banks’ activities — accepting deposits and making loans — naturally exposes their balance sheets to changes in interest rates. In equilibrium, the bond risk premium compensates banks for bearing these fluctuations: for instance, when consumers demand for fixed rate mortgages increases, banks have to scale up their exposure to interest rate risk and are compensated by an increase in bond risk premium. A key insight is that the net exposure of banks, rather than quantities of particular types of loans or deposits, reveals the risk premium.

Date: 2016
New Economics Papers: this item is included in nep-ban and nep-fmk
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: The Banking View of Bond Risk Premia (2020)
Working Paper: The Banking View of Bond Risk Premia (2019)
Working Paper: The Banking View of Bond Risk Premia (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:814

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