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Riding the yield curve: Term premiums and excess returns

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  • Rolando F. Pelaez

Abstract

Riding the yield curve is an active portfolio strategy consisting of buying bonds with maturities longer than one's holding period and selling before maturity. The objective is to profit from a higher initial yield and a possible capital gain as the bond “rides” down an upward sloping yield curve. The evidence presented in this paper shows that compared with the buy‐and‐hold, 1‐year rides with 2‐year Treasury securities produce higher average returns, but do not yield excess risk‐adjusted returns. Incremental returns from riding represent term premiums, instead of pure profits. These findings are consistent with the liquidity premium theory of the term structure.

Suggested Citation

  • Rolando F. Pelaez, 1997. "Riding the yield curve: Term premiums and excess returns," Review of Financial Economics, John Wiley & Sons, vol. 6(1), pages 113-119.
    • Handle: RePEc:wly:revfec:v:6:y:1997:i:1:p:113-119
    DOI: 10.1016/S1058-3300(97)90017-3
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