Abstract
| Original language | English |
|---|---|
| Pages (from-to) | 180-200 |
| Number of pages | 21 |
| Journal | Journal of Empirical Finance |
| Volume | 32 |
| Early online date | 23 Mar 2015 |
| DOIs | |
| Publication status | Published - Jun 2015 |
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Keywords
- Epstein–Zin–Weil preferences
- consumption risk
- asset pricing tests
- government bonds
- factor analysis
Cite this
Consumption Risk and the Cross-Section of Government Bond Returns. / Abhyankar, Abhay; Klinkowska, Olga; Lee, Soyeon.
In: Journal of Empirical Finance, Vol. 32, 06.2015, p. 180-200.Research output: Contribution to journal › Article
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TY - JOUR
T1 - Consumption Risk and the Cross-Section of Government Bond Returns
AU - Abhyankar, Abhay
AU - Klinkowska, Olga
AU - Lee, Soyeon
N1 - Acknowledgments We are grateful to the anonymous reviewers for their constructive suggestions which helped us to improve the manuscript. We would also like to thank David Babbel, Angela Black, Jordi Caballe, Laurence Copeland, Antonio Diez de los Rios, Kabir Dutta, Javier Gil-Bazo, Lynda Khalaf, Chung-Ming Kuan, Patrick Minford, Francisco Penaranda, Jesper Rangvid, Enrique Sentana and seminar participants at the Universities of Aarhus, Aberdeen, Autonoma de Barcelona, Cardiff, Carlos III de Madrid, Essex, National Central University (Taiwan), National Taiwan University, Pompeu Fabra, Reading and the participants at the 2009 Warsaw International Economic Meeting, 2009 Econometric Society European Meeting Barcelona, 2009 ASSET Istanbul, XVII Foro Finanzas Madrid, XXXIV SAEe Valencia, 5th PhD Meeting of RES London for helpful discussions and comments.
PY - 2015/6
Y1 - 2015/6
N2 - In this paper we provide a consumption-based explanation of risk in nominal US Treasury bond portfolios. We use a consumption-CAPM with Epstein–Zin–Weil recursive preferences. Our model introduces two sources of risk: uncertainty about current consumption (reflected in contemporaneous consumption growth) and uncertainty about prospects of consumption in a long run (reflected in innovations to expectations about future consumption growth). We use a novel approach to estimate pricing factors in our model: we employ a factor-augmented VAR model with common factors, extracted from a large panel of macroeconomic and financial data, as state variables. We find that the important source of risk in US bonds is related to uncertainty in prospects in future consumption and it induces a positive and significant risk premium. We find as well that covariance risk related to innovations in expectations about future consumption growth is greater for long term bond portfolios than for short term bond portfolios, which is consistent with a duration measure of risk and justifies why long term bonds require greater premium than short term bonds. Our model explains well the cross-sectional variation in average excess returns of bonds with different maturities over the period 1975–2011 and compares favorably with competing models.
AB - In this paper we provide a consumption-based explanation of risk in nominal US Treasury bond portfolios. We use a consumption-CAPM with Epstein–Zin–Weil recursive preferences. Our model introduces two sources of risk: uncertainty about current consumption (reflected in contemporaneous consumption growth) and uncertainty about prospects of consumption in a long run (reflected in innovations to expectations about future consumption growth). We use a novel approach to estimate pricing factors in our model: we employ a factor-augmented VAR model with common factors, extracted from a large panel of macroeconomic and financial data, as state variables. We find that the important source of risk in US bonds is related to uncertainty in prospects in future consumption and it induces a positive and significant risk premium. We find as well that covariance risk related to innovations in expectations about future consumption growth is greater for long term bond portfolios than for short term bond portfolios, which is consistent with a duration measure of risk and justifies why long term bonds require greater premium than short term bonds. Our model explains well the cross-sectional variation in average excess returns of bonds with different maturities over the period 1975–2011 and compares favorably with competing models.
KW - Epstein–Zin–Weil preferences
KW - consumption risk
KW - asset pricing tests
KW - government bonds
KW - factor analysis
U2 - 10.1016/j.jempfin.2015.03.015
DO - 10.1016/j.jempfin.2015.03.015
M3 - Article
VL - 32
SP - 180
EP - 200
JO - Journal of Empirical Finance
JF - Journal of Empirical Finance
SN - 0927-5398
ER -