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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.

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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jebusi:v:63:y:2011:i:6:p:582-604
    DOI: 10.1016/j.jeconbus.2011.06.001
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    References listed on IDEAS

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    Cited by:

    1. Michelfelder, Richard A., 2015. "Empirical analysis of the generalized consumption asset pricing model: Estimating the cost of capital," Journal of Economics and Business, Elsevier, vol. 80(C), pages 37-50.
    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.

    More about this item

    Keywords

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

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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