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The reinvestment risk premium in the valuation of British and Russian government bonds

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  • Teplova, Tamara V.
  • Rodina, Victoria A.

Abstract

This article studies the dynamic properties of the reinvestment risk premium in the UK and RF government bond markets. In a new interest rate environment when sovereign debt trades at a low and even negative yields and bond funds are struggling to earn sufficient returns, bond investors have become increasingly wary of reinvestment risk largely neglected previously. The reinvestment risk premium is quantified on the basis of replicating portfolios and further analyzed with respect to exposure to exogenous influence with the help of cointegration techniques. The findings are that in both markets investors recognize the significance of reinvestment risk. However, there are differences in the sensitivity of the reinvestment risk premium to exogenous indicators. In the UK government bond market investors tend to be guided by more conservative indicators but are ready to forecast in the medium-run; in the RF government bond market investors tend to be guided by less conservative indicators but are ready to forecast only in the short-run.

Suggested Citation

  • Teplova, Tamara V. & Rodina, Victoria A., 2021. "The reinvestment risk premium in the valuation of British and Russian government bonds," Research in International Business and Finance, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:riibaf:v:55:y:2021:i:c:s0275531919307718
    DOI: 10.1016/j.ribaf.2020.101319
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    More about this item

    Keywords

    Reinvestment risk; Risk premium; Government bond; Value additivity; Cointegration; ECM;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • F3 - International Economics - - International Finance

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