The Banking View of Bond Risk Premia
Working Paper 26369
DOI 10.3386/w26369
Issue Date
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.
Published Versions
VALENTIN HADDAD & DAVID SRAER, 2020. "The Banking View of Bond Risk Premia," The Journal of Finance, vol 75(5), pages 2465-2502. citation courtesy of