IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/14207.html
   My bibliography  Save this paper

The Banking View of Bond Risk Premia

Author

Listed:
  • Sraer, David
  • Haddad, Valentin

Abstract

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 supporting this view, but also discuss several challenges to this interpretation.

Suggested Citation

  • Sraer, David & Haddad, Valentin, 2019. "The Banking View of Bond Risk Premia," CEPR Discussion Papers 14207, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14207
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP14207
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2012. "The Aggregate Demand for Treasury Debt," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 233-267.
    2. Markus K. Brunnermeier & Yuliy Sannikov, 2014. "A Macroeconomic Model with a Financial Sector," American Economic Review, American Economic Association, vol. 104(2), pages 379-421, February.
    3. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
    4. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    5. Ilan Cooper, 2009. "Time-Varying Risk Premiums and the Output Gap," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2601-2633, July.
    6. Hui Chen & Michael Michaux & Nikolai Roussanov, 2020. "Houses as ATMs: Mortgage Refinancing and Macroeconomic Uncertainty," Journal of Finance, American Finance Association, vol. 75(1), pages 323-375, February.
    7. Zhiguo He & Arvind Krishnamurthy, 2013. "Intermediary Asset Pricing," American Economic Review, American Economic Association, vol. 103(2), pages 732-770, April.
    8. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2017. "The Deposits Channel of Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1819-1876.
    9. Zhiguo He & Arvind Krishnamurthy, 2019. "A Macroeconomic Framework for Quantifying Systemic Risk," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(4), pages 1-37, October.
    10. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2016. "Mortgage Risk and the Yield Curve," The Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1220-1253.
    11. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    12. Tobias Adrian & Hyun Song Shin, 2014. "Procyclical Leverage and Value-at-Risk," The Review of Financial Studies, Society for Financial Studies, vol. 27(2), pages 373-403.
    13. D’Amico, Stefania & King, Thomas B., 2013. "Flow and stock effects of large-scale treasury purchases: Evidence on the importance of local supply," Journal of Financial Economics, Elsevier, vol. 108(2), pages 425-448.
    14. Purnanandam, Amiyatosh, 2007. "Interest rate derivatives at commercial banks: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1769-1808, September.
    15. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," NBER Working Papers 24582, National Bureau of Economic Research, Inc.
    16. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
    17. Scott Joslin & Marcel Priebsch & Kenneth J. Singleton, 2014. "Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks," Journal of Finance, American Finance Association, vol. 69(3), pages 1197-1233, June.
    18. William J. Baumol, 1952. "The Transactions Demand for Cash: An Inventory Theoretic Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 66(4), pages 545-556.
    19. David Neumark & Steven A. Sharpe, 1992. "Market Structure and the Nature of Price Rigidity: Evidence from the Market for Consumer Deposits," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 107(2), pages 657-680.
    20. Baker, Malcolm & Greenwood, Robin & Wurgler, Jeffrey, 2003. "The maturity of debt issues and predictable variation in bond returns," Journal of Financial Economics, Elsevier, vol. 70(2), pages 261-291, November.
    21. Refet S. Gürkaynak & Jonathan H. Wright, 2012. "Macroeconomics and the Term Structure," Journal of Economic Literature, American Economic Association, vol. 50(2), pages 331-367, June.
    22. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 3-46, February.
    23. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
    24. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
    25. Gregory R. Duffee, 2018. "Expected Inflation and Other Determinants of Treasury Yields," Journal of Finance, American Finance Association, vol. 73(5), pages 2139-2180, October.
    26. John H. Cochrane & Monika Piazzesi, 2005. "Bond Risk Premia," American Economic Review, American Economic Association, vol. 95(1), pages 138-160, March.
    27. He, Zhiguo & Kelly, Bryan & Manela, Asaf, 2017. "Intermediary asset pricing: New evidence from many asset classes," Journal of Financial Economics, Elsevier, vol. 126(1), pages 1-35.
    28. Sebastian Di Tella & Pablo Kurlat, 2021. "Why Are Banks Exposed to Monetary Policy?," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(4), pages 295-340, October.
    29. Adrian, Tobias & Crump, Richard K. & Moench, Emanuel, 2013. "Pricing the term structure with linear regressions," Journal of Financial Economics, Elsevier, vol. 110(1), pages 110-138.
    30. Lars E.O. Svensson, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994," NBER Working Papers 4871, National Bureau of Economic Research, Inc.
    31. Tobias Adrian & Erkko Etula & Tyler Muir, 2014. "Financial Intermediaries and the Cross-Section of Asset Returns," Journal of Finance, American Finance Association, vol. 69(6), pages 2557-2596, December.
    32. Juliane Begenau & Monika Piazzesi & Martin Schneider, 2015. "Banks' Risk Exposures," NBER Working Papers 21334, National Bureau of Economic Research, Inc.
    33. Jennie Bai & Arvind Krishnamurthy & Charles†Henri Weymuller, 2018. "Measuring Liquidity Mismatch in the Banking Sector," Journal of Finance, American Finance Association, vol. 73(1), pages 51-93, February.
    34. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
    35. Dong Beom Choi & Hyun-Soo Choi, 2021. "The Effect of Monetary Policy on Bank Wholesale Funding," Management Science, INFORMS, vol. 67(1), pages 388-416, January.
    36. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
    37. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-945, September.
    38. Kirti, Divya, 2020. "Why do bank-dependent firms bear interest-rate risk?," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    39. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    40. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    41. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
    42. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-386.
    43. Flannery, Mark J, 1981. "Market Interest Rates and Commercial Bank Profitability: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(5), pages 1085-1101, December.
    44. John Y. Campbell & Robert J. Shiller, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 495-514.
    45. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    46. Eric T. Swanson, 2011. "Let's Twist Again: A High-Frequency Event-study Analysis of Operation Twist and Its Implications for QE2," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 151-207.
    47. Anna Cieslak & Pavol Povala, 2015. "Expected Returns in Treasury Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 28(10), pages 2859-2901.
    48. Guillaume Vuillemey, 2019. "Bank Interest Rate Risk Management," Management Science, INFORMS, vol. 65(12), pages 5933-5956, December.
    49. Michael D. Bauer & James D. Hamilton, 2018. "Robust Bond Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 399-448.
    50. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 215-287.
    51. Gregory R. Duffee, 2011. "Information in (and not in) the Term Structure," The Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 2895-2934.
    52. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    53. Alan Moreira & Tyler Muir, 2017. "Volatility-Managed Portfolios," Journal of Finance, American Finance Association, vol. 72(4), pages 1611-1644, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Valentin Haddad & Tyler Muir, 2021. "Do Intermediaries Matter for Aggregate Asset Prices?," Journal of Finance, American Finance Association, vol. 76(6), pages 2719-2761, December.
    2. Baltzer, Markus & Koehl, Alexandra & Reitz, Stefan, 2020. "Procyclical leverage in Europe and its role in asset pricing," Journal of International Money and Finance, Elsevier, vol. 107(C).
    3. Valentin Haddad & Alan Moreira & Tyler Muir, 2021. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response [Funding value adjustments]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5309-5351.
    4. Kai Li & Chenjie Xu, 2023. "Asset pricing with a financial sector," Financial Management, Financial Management Association International, vol. 52(1), pages 67-95, March.
    5. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2021. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," Journal of Finance, American Finance Association, vol. 76(3), pages 1091-1143, June.
    6. Fatih Altunok & Yavuz Arslan & Steven Ongena, 2023. "Monetary Policy Transmission with Adjustable and Fixed Rate Mortgages: The Role of Credit Supply," Working Papers 202305, University of Liverpool, Department of Economics.
    7. Libo Yin & Jing Nie, 2021. "Intermediary asset pricing in currency carry trade returns," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(8), pages 1241-1267, August.
    8. Du, Wenxin & Hébert, Benjamin & Li, Wenhao, 2023. "Intermediary balance sheets and the treasury yield curve," Journal of Financial Economics, Elsevier, vol. 150(3).
    9. Robin Greenwood & Samuel Hanson & Dimitri Vayanos, 2023. "Supply and Demand and the Term Structure of Interest Rates," NBER Working Papers 31879, National Bureau of Economic Research, Inc.
    10. Dong, Mei & Huangfu, Stella & Sun, Hongfei & Zhou, Chenggang, 2021. "A macroeconomic theory of banking oligopoly," European Economic Review, Elsevier, vol. 138(C).
    11. Paul, Pascal, 2023. "Banks, maturity transformation, and monetary policy," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    12. Hanson, Samuel G. & Malkhozov, Aytek & Venter, Gyuri, 2024. "Demand-and-supply imbalance risk and long-term swap spreads," Journal of Financial Economics, Elsevier, vol. 154(C).
    13. Sinclair, Andrew J., 2023. "Do prime brokers intermediate capital?," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    14. Robin Greenwood & Samuel G. Hanson & Jeremy C. Stein & Adi Sunderam, 2020. "A Quantity-Driven Theory of Term Premia and Exchange Rates," NBER Working Papers 27615, National Bureau of Economic Research, Inc.
    15. Camelia Minoiu & Andrés Schneider & Min Wei, 2023. "Why Does the Yield Curve Predict GDP Growth? The Role of Banks," FRB Atlanta Working Paper 2023-14, Federal Reserve Bank of Atlanta.
    16. Valentin Haddad & Alan Moreira & Tyler Muir, 2020. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response," NBER Working Papers 27168, National Bureau of Economic Research, Inc.
    17. Adriano A. Rampini & S. Viswanathan & Guillaume Vuillemey, 2020. "Retracted: Risk Management in Financial Institutions," Journal of Finance, American Finance Association, vol. 75(2), pages 591-637, April.
    18. Indrajit Mitra & Yu Xu, 2020. "Limited Household Risk Sharing: General Equilibrium Implications for the Term Structure of Interest Rates," FRB Atlanta Working Paper 2020-20, Federal Reserve Bank of Atlanta.
    19. Ge, Futing & Zhang, Weiguo, 2022. "The determinants of cross-border bond risk premia," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 81(C).
    20. Li, Kai & Xu, Chenjie, 2024. "Intermediary-based equity term structure," Journal of Financial Economics, Elsevier, vol. 157(C).
    21. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2018. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," NBER Working Papers 24582, National Bureau of Economic Research, Inc.
    22. Zhang, Heming & Wang, Guanying, 2021. "Reversal effect and corporate bond pricing in China," Pacific-Basin Finance Journal, Elsevier, vol. 70(C).
    23. Busetto, Filippo, 2024. "Asymmetric expectations of monetary policy," Bank of England working papers 1058, Bank of England.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Liu, Yan & Wu, Jing Cynthia, 2021. "Reconstructing the yield curve," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1395-1425.
    2. Doshi, Hitesh & Jacobs, Kris & Liu, Rui, 2018. "Macroeconomic determinants of the term structure: Long-run and short-run dynamics," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 99-122.
    3. Jeff W. Huther & Jane E. Ihrig & Elizabeth C. Klee, 2017. "The Federal Reserve's Portfolio and its Effect on Interest Rates," Finance and Economics Discussion Series 2017-075, Board of Governors of the Federal Reserve System (U.S.).
    4. Sophocles N. Brissimis & Evangelia A. Georgiou, 2022. "The effects of Federal Reserve's quantitative easing and balance sheet normalization policies on long-term interest rates," Working Papers 299, Bank of Greece.
    5. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2021. "Banking on Deposits: Maturity Transformation without Interest Rate Risk," Journal of Finance, American Finance Association, vol. 76(3), pages 1091-1143, June.
    6. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    7. Goliński, Adam, 2021. "Monetary policy at the zero lower bound: Information in the Federal Reserve’s balance sheet," European Economic Review, Elsevier, vol. 131(C).
    8. Christos Ioannidis & Kook Ka, 2021. "Economic Policy Uncertainty and Bond Risk Premia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1479-1522, September.
    9. Paul, Pascal, 2023. "Banks, maturity transformation, and monetary policy," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    10. Dimitri Vayanos & Jean‐Luc Vila, 2021. "A Preferred‐Habitat Model of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 89(1), pages 77-112, January.
    11. Antonio Gargano & Davide Pettenuzzo & Allan Timmermann, 2019. "Bond Return Predictability: Economic Value and Links to the Macroeconomy," Management Science, INFORMS, vol. 65(2), pages 508-540, February.
    12. Simon Gilchrist & Egon Zakrajšek, 2013. "The Impact of the Federal Reserve's Large‐Scale Asset Purchase Programs on Corporate Credit Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 29-57, December.
    13. Michael E. Cahill & Stefania D'Amico & Canlin Li & John S. Sears, 2013. "Duration risk versus local supply channel in Treasury yields: evidence from the Federal Reserve's asset purchase announcements," Finance and Economics Discussion Series 2013-35, Board of Governors of the Federal Reserve System (U.S.).
    14. Li, Junye & Sarno, Lucio & Zinna, Gabriele, 2024. "Risks and risk premia in the US Treasury market," Journal of Economic Dynamics and Control, Elsevier, vol. 158(C).
    15. Matthieu Darracq Paries, 2018. "Financial frictions and monetary policy conduct," Erudite Ph.D Dissertations, Erudite, number ph18-01 edited by Ferhat Mihoubi.
    16. Swanson, Eric T., 2021. "Measuring the effects of federal reserve forward guidance and asset purchases on financial markets," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 32-53.
    17. Iryna Kaminska & Gabriele Zinna, 2020. "Official Demand for U.S. Debt: Implications for U.S. Real Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 323-364, March.
    18. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    19. Massimo Guidolin & Valentina Massagli & Manuela Pedio, 2021. "Does the cost of private debt respond to monetary policy? Heteroskedasticity-based identification in a model with regimes," The European Journal of Finance, Taylor & Francis Journals, vol. 27(18), pages 1804-1833, December.
    20. Berndt, Antje & Yeltekin, Şevin, 2015. "Monetary policy, bond returns and debt dynamics," Journal of Monetary Economics, Elsevier, vol. 73(C), pages 119-136.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:14207. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.