Consumption Risk and the Cross-Section of Government Bond Returns

Abhay Abhyankar, Olga Klinkowska, Soyeon Lee

Research output: Working paper

Abstract

We use a consumption-based asset pricing model with Epstein-Zin-Weil recursive preferences to explain the cross-section of excess returns on nominal US Treasury bond portfolios. Our model has two pricing factors: innovations to current consumption growth and innovations to expected future consumption growth. We find, over the period 1975-2006, that nominal government bonds are, on average, risky assets as they pay off in good times characterized by good prospects for future consumption growth. The model explains well the cross-sectional variation in mean excess bond returns and provides reasonable estimates of structural parameters. Our results are robust to using alternate test assets, different definitions of consumption and estimation methods.
Original languageEnglish
PublisherSocial Science Electronic Publishing
Number of pages72
DOIs
Publication statusPublished - 2011

Keywords

  • Epstein-Zin-Weil preferences
  • consumption risk
  • asset pricing tests
  • government bonds
  • dynamic factor analysis

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    Abhyankar, A., Klinkowska, O., & Lee, S. (2011). Consumption Risk and the Cross-Section of Government Bond Returns. Social Science Electronic Publishing. https://doi.org/10.2139/ssrn.1112635