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Sharpe and Treynor Ratios on Treasury Bonds

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  • Eugene A. Pilotte

    (Rutgers University—Camden)

  • Frederic P. Sterbenz

    (University of Wyoming)

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    Abstract

    We challenge asset pricing theory with numerous stylized facts regarding risk and return on U.S. Treasury securities. Most striking is our finding that reward/risk ratios vary inversely with maturity and are incredibly high for short-term bills. Apparently investors would do much better engaging in highly leveraged investments in bills instead of purchasing long-maturity bonds or common stocks. Simulations of estimated three-factor affine term structure models do not replicate the high ratios of reward to risk for bills. Other results include business cycle patterns in risk premiums, volatility, and the reward to volatility that vary with maturity.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 1 (January)
    Pages: 149-180

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:149-180

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Michelfelder, Richard A. & Pilotte, Eugene A., 2011. "Treasury Bond risk and return, the implications for the hedging of consumption and lessons for asset pricing," Journal of Economics and Business, Elsevier, vol. 63(6), pages 582-604.
    2. 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.
    3. Valentina Galvani & Stuart Landon, 2013. "Riding the yield curve: a spanning analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 135-154, January.
    4. Medhat Hassanein & Islam Azzam, 2010. "Ex post and ex ante returns and risks under different maturities of treasury bonds: evidence from developed and emerging markets," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 3(1), pages 103-118.

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