Discussion paper

DP18592 Risks and Risk Premia in the US Treasury Market

We analyze the risk-return trade-off in the US Treasury market using a term structure model that features volatility-in-mean effects of multiple sources, and yet preserves tractable bond prices. We find a strong positive relation between risks and risk premia over the 1966-2018 period. While interest-rate risk is the main driver of such positive relation, macro risk plays a non-trivial role, and its omission leads to unstable estimates of the trade-off. Notably, macro risk contributes to the surge and consequent fall of risk premia around the 1980s, whereas it moves inversely with risk premia during the recent 'low yield' period.


Li, J, L Sarno and G Zinna (2023), ‘DP18592 Risks and Risk Premia in the US Treasury Market‘, CEPR Discussion Paper No. 18592. CEPR Press, Paris & London. https://cepr.org/publications/dp18592