Is the Term Premium a Risk Premium? |
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Authors: | Ederington Louis H Goh Jeremy C |
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Institution: | (1) Michael F. Price College of Business Administration, University of Oklahoma, Norman, OK, 73019-0450;(2) College of Business Administration, Tampa, FL 33620-5500 Drexel University, Lebow College of Business, University of South Florida, Philadelphia, PA, 19104 |
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Abstract: | This paper explores whether excess holding period returns on long vis-a-vis short-term securities behave in a manner that is consistent with (1) market efficiency, (2) the time-varying-term-premium variant of the expectations hypothesis, and (3) theories of the term premium that view it as a reward for risk bearing. Both traditional and modern theories of the term premium imply that it should evolve fairly slowly over time as attitudes toward risk and/or perceived covariances with wealth or consumption change. This implies that this period's term premium should have some predictive ability for next period's. However, we find that this quarter's ex-post term premium has zero predictive ability. For monthly rates and returns, the evidence is less clear cut, but again the implied term premia do not behave in a manner consistent with existing theories. |
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