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Excess returns and risk at the long end of the Treasury market: an EGARCH-M approach

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Author Info

  • Allan D. Brunner
  • David P. Simon

Abstract

This paper models weekly excess returns of 10-year Treasury notes and long-term Treasury bonds from 1968 through 1993 using an exponential generalized autoregressive conditional hetroskedasticity in mean (EGARCH-M) approach. The results indicate the presence of conditional hetroskedasticity and a strong tendency for the ex-ante volatility of excess returns to increase more following negative excess return innovations compared to positive innovations of equal magnitude. In addition, increases in ex-ante volatility are associated in some subperiods with rising excess returns on longer-term instruments, although the slope of the yield curve and lagged excess returns generally remain significant predictors of excess returns.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/522/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1995/522/ifdp522.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 522.

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Date of creation: 1995
Date of revision:
Handle: RePEc:fip:fedgif:522

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Keywords: Treasury bills;

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References

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  1. Kenneth A. Froot, 1990. "New Hope for the Expectations Hypothesis of the Term Structure of Interest Rates," NBER Working Papers 2363, National Bureau of Economic Research, Inc.
  2. Brennan, Michael J. & Schwartz, Eduardo S., 1977. "Savings bonds, retractable bonds and callable bonds," Journal of Financial Economics, Elsevier, vol. 5(1), pages 67-88, August.
  3. Hardouvelis, Gikas A., 1994. "The term structure spread and future changes in long and short rates in the G7 countries: Is there a puzzle?," Journal of Monetary Economics, Elsevier, vol. 33(2), pages 255-283, April.
  4. Christie, Andrew A., 1982. "The stochastic behavior of common stock variances : Value, leverage and interest rate effects," Journal of Financial Economics, Elsevier, vol. 10(4), pages 407-432, December.
  5. N. Gregory Mankiw, 1986. "The Term Structure of Interest Rates Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 61-110.
  6. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  7. Brunner, Allan D & Hess, Gregory D, 1993. "Are Higher Levels of Inflation Less Predictable? A State-Dependent Conditional Heteroscedasticity Approach," Journal of Business & Economic Statistics, American Statistical Association, vol. 11(2), pages 187-97, April.
  8. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
  9. 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.
  10. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  11. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
  12. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  13. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
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Citations

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Cited by:
  1. Syed Kumail Abbas Naqvi & Bushra Naqvi, 2010. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 1-33, Jul-Dec.
  2. Karunaratne, Neil Dias & Bhar, Ramprasad, 2011. "Regime-shifts and post-float inflation dynamics of Australia," Economic Modelling, Elsevier, vol. 28(4), pages 1941-1949, July.
  3. Jonathan Batten & Francis In, 2006. "Dynamic interaction and valuation of quality yen Eurobonds in a multivariate EGARCH framework," Applied Financial Economics, Taylor & Francis Journals, vol. 16(12), pages 881-892.
  4. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2009. "Inflation Volatility: An Asian Perspective," MPRA Paper 19489, University Library of Munich, Germany.
  5. M. Karanasos & J. Kim, 2003. "Moments of the ARMA--EGARCH model," Econometrics Journal, Royal Economic Society, vol. 6(1), pages 146-166, 06.
  6. Menelaos Karanasos & J. Kim, . "Alternative GARCH in Mean Models: An Application to the Korean Stock Market," Discussion Papers 00/25, Department of Economics, University of York.
  7. Halkos, George E. & Papadamou, Stephanos T., 2006. "An investigation of bond term premia in international government bond indices," Research in International Business and Finance, Elsevier, vol. 20(1), pages 45-61, March.
  8. Rizvi, Syed Kumail Abbas & Naqvi, Bushra, 2008. "Asymmetric Behavior of Inflation Uncertainty and Friedman-Ball Hypothesis: Evidence from Pakistan," MPRA Paper 19488, University Library of Munich, Germany.
  9. Nadia Saleem, 2008. "Measuring Volatility of Inflation in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 13(2), pages 99-128, Jul-Dec.
  10. Batten, Jonathan & Hogan, Warren & In, Francis, 2002. "Valuing Credit Spreads on Quality Australian Dollar Eurobonds in a Multivariate EGARCH Framework," Australian Economic Papers, Wiley Blackwell, vol. 41(1), pages 115-28, March.
  11. Basma Bekdache & Christopher F. Baum, 1998. "Modeling fixed income excess returns," Boston College Working Papers in Economics 409, Boston College Department of Economics, revised 14 Apr 2000.

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