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Reward‐to‐Risk Ratios in the Treasury‐Bill Market
Author(s) -
Pilotte Eugene A.,
Sterbenz Frederic P.
Publication year - 2001
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/j.1540-6288.2001.tb00019.x
Subject(s) - volatility (finance) , treasury , ex ante , economics , econometrics , autocorrelation , statistics , mathematics , history , archaeology , macroeconomics
We estimate the ex‐ante reward per unit of spot‐rate volatility (the reward‐to‐risk ratio) for U.S. Treasury bills on a monthly basis and find that these ratios vary predictably over time. Reward‐to‐risk ratios are positively autocorrelated; month‐to‐month changes in these ratios are negatively autocorrelated. Variation in these ratios contributes at least as much variation to ex‐ante excess returns as does variation in interest‐rate volatility. Because ex‐ante volatility and the rewards to volatility vary independently, variation in ex‐ante premiums is greater than the variation attributable to changing volatility alone.