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Treasury Bond risk and return, the implications for the hedging of consumption and lessons for asset pricing

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  • Michelfelder, Richard A.
  • Pilotte, Eugene A.
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    Abstract

    All consumption-based models of asset pricing imply that the relation between the conditional mean and conditional volatility of any asset reflects the effectiveness of holding that asset as a hedge against intertemporal variation in the marginal utility of consumption. For Treasury Bonds of various maturities, we find significant positive relations. Our empirical findings support the conclusion that investors must sell bonds short to hedge shocks to marginal utility, because realized bond returns tend to be high (low) when investors least (most) desire an additional dollar of consumption. Implications for special cases of the general consumption-based model are also discussed.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148619511000415
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 6 ()
    Pages: 582-604

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:6:p:582-604

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Treasury Bond; Excess return; Volatility; Consumption; Hedge;

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    References

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    1. John Y. Campbell & Motohiro Yogo, 2003. "Efficient Tests of Stock Return Predictability," NBER Working Papers 10026, National Bureau of Economic Research, Inc.
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    13. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
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    Cited by:
    1. Pauline Ahern & Frank Hanley & Richard Michelfelder, 2011. "New approach to estimating the cost of common equity capital for public utilities," Journal of Regulatory Economics, Springer, vol. 40(3), pages 261-278, December.

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