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Comparing returns of US treasuries versus equities: implications for market and portfolio efficiency

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  • Choong Tze Chua
  • Winston Koh
  • Krishna Ramaswamy

Abstract

We test the efficiency of the US Treasury market by comparing the performance of two yield-spread mean-reverting trades, a 'riding the yield curve' trade and a comparable strategy in the S&P Index. From 1969 to 2000, 'riding the yield curve' and the S&P index are approximately equidistant from the efficient frontier, while one yield-spread trade was highly profitable, and outperformed an equivalent investment in the S&P index by 4.3 times. The large excess returns suggest possible market inefficiencies in the market. Nevertheless, market efficiency in the US Treasury bond market appears to have improved considerably since the late 1980s, and the scope for excess returns has diminished.

Suggested Citation

  • Choong Tze Chua & Winston Koh & Krishna Ramaswamy, 2005. "Comparing returns of US treasuries versus equities: implications for market and portfolio efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 15(17), pages 1213-1218.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:17:p:1213-1218
    DOI: 10.1080/09603100500391560
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    Cited by:

    1. B. Jirasakuldech & Riza Emekter & Unro Lee, 2008. "Business conditions and nonrandom walk behaviour of US stocks and bonds returns," Applied Financial Economics, Taylor & Francis Journals, vol. 18(8), pages 659-672.
    2. Schmidhammer, Christoph & Hille, Vanessa & Wiedemann, Arnd, 2020. "Performance of maturity transformation strategies," Discussion Papers 58/2020, Deutsche Bundesbank.
    3. Chulho Jung & William Shambora & Kyongwook Choi, 2010. "Are stocks really riskier than bonds?," Applied Economics, Taylor & Francis Journals, vol. 42(4), pages 403-412.
    4. Valentina Galvani & Stuart Landon, 2013. "Riding the yield curve: a spanning analysis," Review of Quantitative Finance and Accounting, Springer, vol. 40(1), pages 135-154, January.
    5. Reid Dorsey-Palmateer & Gary Smith, 2007. "Shrunken interest rate forecasts are better forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 425-430.

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