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Sharpe and Treynor Ratios on Treasury Bonds

Author

Listed:
  • Eugene A. Pilotte

    (Rutgers University—Camden)

  • Frederic P. Sterbenz

    (University of Wyoming)

Abstract

We challenge asset pricing theory with numerous stylized facts regarding risk and return on U.S. Treasury securities. Most striking is our finding that reward/risk ratios vary inversely with maturity and are incredibly high for short-term bills. Apparently investors would do much better engaging in highly leveraged investments in bills instead of purchasing long-maturity bonds or common stocks. Simulations of estimated three-factor affine term structure models do not replicate the high ratios of reward to risk for bills. Other results include business cycle patterns in risk premiums, volatility, and the reward to volatility that vary with maturity.

Suggested Citation

  • Eugene A. Pilotte & Frederic P. Sterbenz, 2006. "Sharpe and Treynor Ratios on Treasury Bonds," The Journal of Business, University of Chicago Press, vol. 79(1), pages 149-180, January.
    • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:149-180
    DOI: 10.1086/497409
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    Cited by:

    1. Eric Benhamou & Beatrice Guez, 2018. "Incremental Sharpe and other performance ratios," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 7(4), pages 1-2.
    2. Ahn, Dong-Hyun & Min, Byoung-Kyu & Yoon, Bohyun, 2019. "Why has the size effect disappeared?," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 256-276.
    3. Zaleczna Magdalena & Wolski Rafał, 2010. "Polish Pension Funds Investment - is There A Place For Real Property in A Portfolio?," Folia Oeconomica Stetinensia, Sciendo, vol. 9(1), pages 151-166, January.
    4. Islam Azzam & Jasmin Fouad, 2010. "Evaluation Of The Impact Of Day Trading On The Egyptian Stock Market," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 4(1), pages 1-21.
    5. Othieno, Ferdinand & Biekpe, Nicholas, 2019. "Estimating the conditional equity risk premium in African frontier markets," Research in International Business and Finance, Elsevier, vol. 47(C), pages 538-551.
    6. Pauline Ahern & Frank Hanley & Richard Michelfelder, 2011. "New approach to estimating the cost of common equity capital for public utilities," Journal of Regulatory Economics, Springer, vol. 40(3), pages 261-278, December.
    7. 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.
    8. Kees G. Koedijk & Alfred M.H. Slager & Philip A. Stork, 2016. "Investing in Systematic Factor Premiums," European Financial Management, European Financial Management Association, vol. 22(2), pages 193-234, March.
    9. Byoung‐Kyu Min & Yuchao Xiao, 2021. "Momentum, Reversals, and Business Cycle Turning Points," Abacus, Accounting Foundation, University of Sydney, vol. 57(4), pages 679-708, December.
    10. Wolski Rafal & Załęczna Magdalena, 2017. "Closed-End Real Estate Funds in Comparison with other Investment Opportunities in Poland," Real Estate Management and Valuation, Sciendo, vol. 25(1), pages 19-31, March.
    11. Vukovic, Darko & Lapshina, Kseniya A. & Maiti, Moinak, 2019. "European Monetary Union bond market dynamics: Pre & post crisis," Research in International Business and Finance, Elsevier, vol. 50(C), pages 369-380.
    12. Ayub, Usman & Qaddus, Uzma & Zakaria, Muhammad & Shafique, Attayah & Ahmed, Junaid, 2018. "Thou should not panic! Let calmness fight the Crocodile Bite," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 509(C), pages 302-315.
    13. Michelfelder, Richard A. & Pilotte, Eugene A., 2011. "Treasury Bond risk and return, the implications for the hedging of consumption and lessons for asset pricing," Journal of Economics and Business, Elsevier, vol. 63(6), pages 582-604.
    14. Abhyankar, Abhay & Klinkowska, Olga & Lee, Soyeon, 2015. "Consumption risk and the cross-section of government bond returns," Journal of Empirical Finance, Elsevier, vol. 32(C), pages 180-200.
    15. Medhat Hassanein & Islam Azzam, 2010. "Ex post and ex ante returns and risks under different maturities of treasury bonds: evidence from developed and emerging markets," Macroeconomics and Finance in Emerging Market Economies, Taylor & Francis Journals, vol. 3(1), pages 103-118.
    16. Eric Benhamou & Beatrice Guez, 2021. "Computation of the marginal contribution of Sharpe ratio and other performance ratios," Working Papers hal-03189299, HAL.
    17. N. Serap Vurur, 2019. "Does the Sustainability Index Make a Difference in Returns?," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 9(3-4), pages 17-28.

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