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Far Out on the Yield Curve

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  • Alexius, Annika

    (Department of Economics)

Abstract

Data on short investments in Swedish long-term bonds as the bonds mature contains unusually rich information about the relationship between duration and the first and second moments of bond returns. We identify three different channels through which duration affects bond returns. The liquidity preference hypothesis yields a direct link between duration and returns, which however disappears once indirect effects through the variance of returns and the price of risk are taken into account. The risk premia obtained from a multivariate GARCH-M model extended to allow the variance to depend on duration are of the same size as observed excess returns. Finally, duration appears to affect the relationship between bond returns and the risk free interest rate. One additional year of duration implies that the beta-coeffcient increases by 0.66.

Suggested Citation

  • Alexius, Annika, 2004. "Far Out on the Yield Curve," Working Paper Series 2004:12, Uppsala University, Department of Economics.
  • Handle: RePEc:hhs:uunewp:2004_012
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    File URL: http://www.nek.uu.se/pdf/wp2004_12.pdf
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    References listed on IDEAS

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    13. Gerald R. Brown, 2000. "Duration and Risk," Journal of Real Estate Research, American Real Estate Society, vol. 20(3), pages 337-356.
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    Cited by:

    1. Berg, Lennart & Berger, Tommy, 2005. "The Q theory and the Swedish housing market –an empirical test," Working Paper Series 2005:19, Uppsala University, Department of Economics.

    More about this item

    Keywords

    Bond returns; duration; multivariate GARCH;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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