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Sharpe and Treynor Ratios on Treasury Bonds

Author

Listed:
  • Eugene A. Pilotte

    (Rutgers University—Camden)

  • Frederic P. Sterbenz

    (University of Wyoming)

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.

Suggested Citation

  • Eugene A. Pilotte & Frederic P. Sterbenz, 2006. "Sharpe and Treynor Ratios on Treasury Bonds," The Journal of Business, University of Chicago Press, vol. 79(1), pages 149-180, January.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:149-180
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    References listed on IDEAS

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    Cited by:

    1. Koedijk, Kees & Slager, Alfred & Stork, Philip, 2015. "Investing in Systematic Factor Premiums," CEPR Discussion Papers 10824, C.E.P.R. Discussion Papers.
    2. Zaleczna Magdalena & Wolski Rafał, 2010. "Polish Pension Funds Investment - is There A Place For Real Property in A Portfolio?," Folia Oeconomica Stetinensia, De Gruyter Open, vol. 9(1), pages 151-166, January.
    3. 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.
    4. Abhyankar, Abhay & Klinkowska, Olga & Lee, Soyeon, 2015. "Consumption risk and the cross-section of government bond returns," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 180-200.
    5. 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.
    6. 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.
    7. 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.

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