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Correlations between the Market Price of Interest Rate Risk and Bond Yields

Author

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  • Takashi Yasuoka

    (Graduate School of Engineering Management, Shibaura Institute of Technology, 3-9-14, Shibaura,Minato-ku, Tokyo 108-0023, Japan)

Abstract

This paper examines empirical properties of the market price of interest rate risk, focusing on the relation between the price and interest rates. We briefly summarize how the market price of risk is estimated, and introduce the positive slope model to explain our empirical observation. The market price of risk is estimated for the U.S. Treasury market, 1970-2014, using the Hull–White model. We test the correlation between the market price of interest rate risk and bond yields. The results are that the yield change and term spreads are significantly correlated with the market price of risk, but the initial yields are not correlated with that. These results are theoretically interpreted by a mathematical model, and serve as a valuable reference for risk management as well as for study of financial policy.

Suggested Citation

  • Takashi Yasuoka, 2017. "Correlations between the Market Price of Interest Rate Risk and Bond Yields," Journal of Reviews on Global Economics, Lifescience Global, vol. 6, pages 208-217.
    • Handle: RePEc:lif:jrgelg:v:6:y:2017:p:208-217
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    File URL: http://www.lifescienceglobal.com/independent-journals/journal-of-reviews-on-global-economics/volume-6/85-abstract/jrge/2804-abstract-changes-in-inflation-persistence-prior-and-subsequent-to-the-subprime-crisis-what-are-the-implications-for-south-africa
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    Cited by:

    1. Mariya Gubareva & Maria Rosa Borges, 2022. "Governed by the cycle: interest rate sensitivity of emerging market corporate debt," Annals of Operations Research, Springer, vol. 313(2), pages 991-1019, June.
    2. Mariya Gubareva, 2018. "Historical Interest Rate Sensitivity of Emerging Market Sovereign Debt: Evidence of Regime Dependent Behavior," Annals of Economics and Finance, Society for AEF, vol. 19(2), pages 405-442, November.

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