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Modeling fixed income excess returns

  • Basma Bekdache

    ()

    (Wayne State University)

  • Christopher F. Baum

    ()

    (Boston College
    DIW Berlin)

Excess returns earned in fixed-income markets have been modeled using the ARCH-M model of Engle et al. and its variants. We investigate whether the empirical evidence obtained from an ARCH-M type model is sensitive to the definition of the holding period (ranging from 5 days to 90 days) or to the choice of data used to compute excess returns (coupon or zero-coupon bonds). There is robust support for the inclusion of a term spread in a model of excess returns, while the significance of the in-mean term depends on characteristics of the underlying data.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 409.

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Length: 33 pages
Date of creation: 26 Jun 1998
Date of revision: 14 Apr 2000
Handle: RePEc:boc:bocoec:409
Note: This paper was previously titled "Conditional heteroskedasticity models of excess returns: How robust are the results?"
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  1. 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.
  2. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
  3. Tzavalis, Elias & Wickens, Michael R, 1997. "Explaining the Failures of the Term Spread Models of the Rational Expectations Hypothesis of the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 364-80, August.
  4. Brunner, Allan D & Simon, David P, 1996. "Excess Returns and Risk at the Long End of the Treasury Market: An EGARCH-M Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(3), pages 443-57, Fall.
  5. Robert J. Shiller & John Y. Campbell & Kermit L. Schoenholtz, 1983. "Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates," Cowles Foundation Discussion Papers 667, Cowles Foundation for Research in Economics, Yale University.
  6. Allan D. Brunner & David P. Simon, 1996. "Excess Returns And Risk At The Long End Of The Treasury Market: An Egarch-M Approach," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(3), pages 443-457, 09.
  7. Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
  8. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
  9. 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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