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Is the Term Premium a Risk Premium?

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  • Ederington, Louis H
  • Goh, Jeremy C

Abstract

This paper explores whether excess holding period returns on long vis-a-vis short-term securities behave in a manner that is consistent with (1) market efficiency, (2) the time-varying-term-premium variant of the expectations hypothesis, and (3) theories of the term premium that view it as a reward for risk bearing. Both traditional and modern theories of the term premium imply that it should evolve fairly slowly over time as attitudes toward risk and/or perceived covariances with wealth or consumption change. This implies that this period's term premium should have some predictive ability for next period's. However, we find that this quarter's ex-post term premium has zero predictive ability. For monthly rates and returns, the evidence is less clear cut, but again the implied term premia do not behave in a manner consistent with existing theories. Copyright 1999 by Kluwer Academic Publishers

Suggested Citation

  • Ederington, Louis H & Goh, Jeremy C, 1999. "Is the Term Premium a Risk Premium?," Review of Quantitative Finance and Accounting, Springer, vol. 13(2), pages 137-151, September.
    • Handle: RePEc:kap:rqfnac:v:13:y:1999:i:2:p:137-51
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