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Uncertain Risk and Return in Bond Markets, I

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  • Chan R. Mang

Abstract

I use the term structure model in Cochrane and Piazzesi (2008) and construct currency market prices. The implied currency market prices are counterfactually volatile and predictable, at least with respect to commonly used predictor variables. Getting the model closer to currency market data means reducing bond risk compensation but doing so nearly eliminates predictability in bond markets. One way to generate sensible time-variation in predictable bond and currency excess returns allows the volatility of returns to be time-varying. Additional avenues that can jointly account for the stochastic properties of bond and currency excess returns are also discussed.

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  • Chan R. Mang, 2014. "Uncertain Risk and Return in Bond Markets, I," 2014 Papers pma1706, Job Market Papers.
    • Handle: RePEc:jmp:jm2014:pma1706
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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