The Banking View of Bond Risk Premia
Corresponding Author
VALENTIN HADDAD
Correspondence: Valentin Haddad, Anderson School of Management, UCLA, 110 Westwood Plaza, Los Angeles, CA 90095; e-mail: valentin.haddad@anderson.ucla.edu.
Search for more papers by this authorDAVID SRAER
Valentin Haddad is with UCLA and NBER. David Sraer is with UC Berkeley, NBER, and CEPR.We gratefully acknowledge the useful comments and suggestions of Stefan Nagel; an Associate Editor; two anonymous referees; Tobias Adrian; Mikhail Chernov; Anna Cieslak; John Cochrane; Arvind Krishnamurthy; Augustin Landier; Giorgia Piacentino; Monika Piazzesi; David Thesmar; Dimitri Vayanos; as well as seminar participants at Kellogg, Princeton, the University of Michigan, Stanford, the Federal Reserve Bank of New York, the UNC Junior Faculty Roundtable, the NBER Summer Institute, CITE, the MFS meeting, the Adam Smith Conference, and the SED Annual Meeting. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Search for more papers by this authorCorresponding Author
VALENTIN HADDAD
Correspondence: Valentin Haddad, Anderson School of Management, UCLA, 110 Westwood Plaza, Los Angeles, CA 90095; e-mail: valentin.haddad@anderson.ucla.edu.
Search for more papers by this authorDAVID SRAER
Valentin Haddad is with UCLA and NBER. David Sraer is with UC Berkeley, NBER, and CEPR.We gratefully acknowledge the useful comments and suggestions of Stefan Nagel; an Associate Editor; two anonymous referees; Tobias Adrian; Mikhail Chernov; Anna Cieslak; John Cochrane; Arvind Krishnamurthy; Augustin Landier; Giorgia Piacentino; Monika Piazzesi; David Thesmar; Dimitri Vayanos; as well as seminar participants at Kellogg, Princeton, the University of Michigan, Stanford, the Federal Reserve Bank of New York, the UNC Junior Faculty Roundtable, the NBER Summer Institute, CITE, the MFS meeting, the Adam Smith Conference, and the SED Annual Meeting. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Search for more papers by this authorABSTRACT
Banks' balance sheet exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with optimal risk management, a banking counterpart to the household Euler equation. In equilibrium, the bond risk premium compensates banks for bearing fluctuations in interest rates. When banks' exposure to interest rate risk increases, the price of this risk simultaneously rises. We present a collection of empirical observations that support this view, but also discuss several challenges to this interpretation.
Supporting Information
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Appendix S1: Internet Appendix. |
| jofi12949-sup-0002-ReplicationCode.zip131.9 MB |
Replication code. |
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