Premium
Term structure determinants of time‐varying risk of 1‐year bond returns
Author(s) -
Khanapure Revansiddha Basavaraj
Publication year - 2020
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/fire.12222
Subject(s) - bond , economics , risk premium , yield curve , econometrics , volatility (finance) , interest rate , interest rate risk , inflation (cosmology) , financial economics , conditional variance , bond valuation , monetary economics , autoregressive conditional heteroskedasticity , finance , physics , theoretical physics
Term structure drivers of 1‐year bond premia and conditional bond return risk are distinct. Consequently, the Cochrane–Piazzesi factor captures aggregate price of risk and not the amount of risk in 1‐year bond returns. One linear combination of forward rates captures most of the variation in bond return risk across maturities. Interest rate level captures substantial amount of variation in the conditional return risk, a finding consistent with rising inflation uncertainty with level of inflation and interest rates. The 4‐5 yield spread, an important positive predictor of bond return premia, has an opposing but limited impact on the conditional volatility.