Term structure of interest rates with short-run and long-run risks

Grishchenko，Olesya V.1; Song，Zhaogang2; Zhou，Hao3,4

2022-11-01

10.1016/j.jfds.2022.09.001

Journal of Finance and Data Science   Impact Factor & Quartile

2405-9188

We find that interest rate variance risk premium (IRVRP) — the difference between implied and realized variances of interest rates — is a strong predictor of U.S. Treasury bond returns of maturities ranging between one and ten years for return horizons up to six months. IRVRP is not subsumed by other predictors such as forward rate spread or equity variance risk premium. These results are robust in a number of dimensions. We rationalize our findings within a consumption-based model with long-run risk, economic uncertainty, and inflation non-neutrality. In the model IRVRP is related to short-run risk only, while standard forward-rate-based factors are associated with both short-run and long-run risks in the economy. Our model qualitatively replicates the predictability pattern of IRVRP for bond returns.

Bond return predictability Economic uncertainty Interest rate derivatives Interest rate variance risk premium Long-run risk Term structure of interest rates

English

Others

2-s2.0-85141290840

Scopus

1.Division of Monetary Affairs,Federal Reserve Board,Washington, DC,20551,United States
2.Carey School of Business,John Hopkins University,Baltimore,100 International Drive,21202,United States
3.SUSTech Business School,Southern University of Science and Technology,China
4.PBC School of Finance,Tsinghua University,Beijing,43 Chengfu Road, Haidian District,100083,China

Grishchenko，Olesya V.,Song，Zhaogang,Zhou，Hao. Term structure of interest rates with short-run and long-run risks[J]. Journal of Finance and Data Science,2022,8:255-295.

Grishchenko，Olesya V.,Song，Zhaogang,&Zhou，Hao.(2022).Term structure of interest rates with short-run and long-run risks.Journal of Finance and Data Science,8,255-295.

Grishchenko，Olesya V.,et al."Term structure of interest rates with short-run and long-run risks".Journal of Finance and Data Science 8(2022):255-295.