Reward-to-risk ratios in the treasury-bill market

Eugene A. Pilotte, Frederic P. Sterbenz

Research output: Contribution to journalArticlepeer-review

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 languageEnglish (US)
Pages (from-to)39-62
Number of pages24
JournalFinancial Review
Volume36
Issue number3
DOIs
StatePublished - Aug 2001

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Keywords

  • Excess returns
  • Interest rate volatility
  • Risk premiums
  • Treasury bills

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