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Article
Time-varying risk and return in the bond market: a test of a new equilibrium pricing model
The Review of Financial Studies
Document Type
Article
Disciplines
Publication Date
1-1-1999
DOI
10.1093/rfs/12.3.631
Abstract
This article uses bond market data to empirically test the asset pricing model of Kazemi (1992). According to this model the rate of return on a long-term, pure-discount, default-free bond will be perfectly correlated with changes in the marginal utility of the representative investor. The covariability between financial asset returns and returns on such a bond can therefore serve as a measure of the riskiness of assets. The aim of this study is to determine whether the model can explain cross-sectional differences in the monthly returns of bonds with different maturity dates. We estimate and test the restrictions imposed by the model on returns of default-free bonds, while allowing the conditional distribution of bond returns to be time varying. The model is rejected during the full sample period (1973-1995) and the subperiod (1973-1980) when the Federal Reserve's focus is on interest rates, while the model is not rejected during the subperiod (1981-1995) when the Federal Reserve's focus is on money supply.
Copyright Owner
The Society for Financial Studies
Copyright Date
1999
Language
en
File Format
application/pdf
Citation Information
Cynthia J. Campbell, Hossein B. Kazemi and Prasad Nanisetty. "Time-varying risk and return in the bond market: a test of a new equilibrium pricing model" The Review of Financial Studies Vol. 12 Iss. 3 (1999) p. 631 - 642 Available at: http://works.bepress.com/cynthia_campbell/13/
This is a preprint of an article published in The Review of Financial Studies. © 1999 The Society for Financial Studies. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. doi:10.1093/rfs/12.3.631.