The Banking View of Bond Risk Premia

David Sraer and Valentin Haddad

No 14207, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Date: 2019-12
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The Banking View of Bond Risk Premia (2020)
Working Paper: The Banking View of Bond Risk Premia (2019)
Working Paper: The Banking View of Bond Risk Premia (2016)
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