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Reward-to-Risk Ratios in the Treasury-Bill Market

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  • Pilotte, Eugene A
  • Sterbenz, Frederic P

Abstract

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. Copyright 2001 by MIT Press.

Suggested Citation

  • Pilotte, Eugene A & Sterbenz, Frederic P, 2001. "Reward-to-Risk Ratios in the Treasury-Bill Market," The Financial Review, Eastern Finance Association, vol. 36(3), pages 39-61, August.
    • Handle: RePEc:bla:finrev:v:36:y:2001:i:3:p:39-61
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