Abstract
We estimate the ex-ante reward per unit of spot-rate volatility (the reward-to-risk ratio) for U.S. Treasury bills on a monthly basis and find that these ratios vary predictably over time. Reward-to-risk ratios are positively autocorrelated; month-to-month changes in these ratios are negatively autocorrelated. Variation in these ratios contributes at least as much variation to ex-ante excess returns as does variation in interest-rate volatility. Because ex-ante volatility and the rewards to volatility vary independently, variation in ex-ante premiums is greater than the variation attributable to changing volatility alone.
Original language | English (US) |
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Pages (from-to) | 39-62 |
Number of pages | 24 |
Journal | Financial Review |
Volume | 36 |
Issue number | 3 |
DOIs | |
State | Published - Aug 2001 |
All Science Journal Classification (ASJC) codes
- Finance
- Economics and Econometrics
Keywords
- Excess returns
- Interest rate volatility
- Risk premiums
- Treasury bills