Treasury Bill Returns Research Articles

Mean Aversion and Reversion of Asset Returns

This study investigates autocorrelations in returns of six relatively safe and risky U.S. financial assets for one to ten years. Treasury bills and bonds display mean aversion in most periods whereas small company stocks exhibit mean reversion in all periods. The safest asset shows the strongest mean aversion and the riskiest asset has the strongest mean reversion. Large company stocks switch between mean aversion and reversion. Mean aversion of bond returns generally reflects mean aversion in Treasury bill returns. Mean reversion of stock returns is due to their negative relationships with prior risk-free returns and risk premiums in most periods.

Do stocks outperform treasury bills in international markets?

More than half the common stocks in the majority (55 of 57) of international equity markets generate total returns less than Treasury bill returns. However, there is a sizable variation in the extent of this underperformance. A greater proportion of stocks underperform in countries with weaker governance, less individualistic investors, less openness to trade and foreign equity market investment, less financial market development, and weaker economies.

A Proposed Model to Interpret the Behavior of Macroeconomic / Market Variables and Their Linkage with the Saudi Petrochemical Sector: نموذج مقترح لتفسير سلوك المتغيرات الاقتصادية الكلية والسوقية وعلاقتها بعائد قطاع البتروكيماويات السعودي

The study seeks to identify the economic and the market factors that، effect on the returns of the petrochemical sector market listed at the Saudi Tadawul market، using the arbitrage pricing model to estimate the return of the petrochemical sector، using some economic variables such as changes in oil prices، the growth rate in the gross national product and the rate of inflation. The study found through the multi linear regression model showed that، there is a positive relationship between the returns of the petrochemical sector with the market value، money supply، and the treasury bill returns. The researchers recommended that، the study be conducted on other economic variables and for a longer period، as well as measure the impact of economic variables on the returns of the Saudi market using other sectors.

Improving the predictability of real economic activity and asset returns with forward variances inferred from option portfolios

This paper presents an option positioning that allows us to infer forward variances from option portfolios. The forward variances we construct from equity index options help to predict (i) growth in measures of real economic activity, (ii) Treasury bill returns, (iii) stock market returns, and (iv) changes in variance swap rates. Our yardstick for measuring predictive ability is both individual and joint parameter statistical significance within a market, as well as across a set of markets.

Improving the Predictability of Real Economic Activity and Asset Returns with Forward Variances Inferred from Option Portfolios

This paper presents an option positioning that allows us to infer forward variances from option portfolios. The forward variances we construct from equity index options help to predict (i) growth in measures of real economic activity, (ii) Treasury bill returns, (iii) stock market returns, and (iv) changes in variance swap rates. Our yardstick for measuring predictive ability is both individual and joint parameter statistical significance within a market, as well as across a set of markets.

Dynamic modeling under linear-exponential loss

We develop a methodology of parametric modeling of time series dynamics when the underlying loss function is linear-exponential (Linex). We propose to directly model the dynamics of the conditional expectation that determines the optimal predictor. The procedure hinges on the exponential quasi-maximum likelihood interpretation of the Linex loss and nicely fits the multiplicative error modeling framework. Many conclusions relating to estimation, inference and forecasting follow from results already available in the econometric literature. The methodology is illustrated using data on United States GNP growth and Treasury bill returns.

Dynamic Modeling Under Linear-Exponential Loss

We develop a methodology of parametric modeling of time series dynamics when the underlying loss function is linear-exponential (Linex). We propose to directly model the dynamics of the conditional expectation that determines the optimal predictor. The procedure hinges on the exponential quasi maximum likelihood interpretation of the Linex loss and nicely fits the multiple error modeling framework. Many conclusions relating to estimation, inference and forecasting follow from results already available in the econometric literature. The methodology is illustrated using data on United States GNP growth and Treasury bill returns.

Systematic Patterns in Daily Treasury Bill Returns and Spreads

Nonparametric tests reject that rankings of Treasury bill returns are random within months. Treasury bills tend to earn lower returns on the first trading day of the month of January. This pattern in January does not extend to the other months of the year. Unlike stocks, bill returns are approximately equal during the first and second half of the month. Bid-ask spreads, however, are much larger during the second half of the month than during the first.

The Impact of Political Control on U.S. Investment Returns 1926–1999

Do small- and large-capitalization stock returns differ when there is Democratic, or Republican, or mixed control of the executive and legislative branches of the United States federal government? Do corporate bonds, intermediate- and long-term government bonds, and Treasury bill returns differ in these cases? The authors test various investment strategies that attempt to capitalize on the effects of control of both executive and legislative branches. The results document the differences in returns in four different holding periods by political control. A strategy based solely on political control of the executive branch has gone out of favor since 1976. The dominant trading rule since then relies on political control of Congress.

Can the volatility of the federal funds rate explain the time-varying risk premium in treasury bill returns?

The implementation of monetary policy through financial markets is widely believed to be an important factor affecting the return on financial assets, particularly the return on short-term government debt. This paper assesses the effects of shocks to monetary policy on Treasury bill returns by fitting a factor-ARCH model with a candidate factor based on innovations in the federal funds rate. We find that positive policy shocks significantly reduce Treasury bill returns and significantly increase the volatility of Treasury bill returns, but that the volatility of policy shocks does not explain the time-varying risk premia in Treasury bill returns.

Economic tracking portfolios

An economic tracking portfolio is a portfolio of assets with returns that track an economic variable. Monthly returns on stocks and bonds help forecast post-war US output, consumption, labor income, inflation, stock returns, bond returns, and Treasury bill returns. These forecasting relationships define portfolios that track market expectations about future economic variables. Out-of-sample results show that tracking portfolios, despite forecast deterioration, can be useful in forecasting macroeconomic variables.

Smooth Transition ARCH Models: Estimation and Testing

In this paper, we suggest an extension of the ARCH model, the smooth-transition autoregressive conditional heteroskedasticity (STARCH) model. STARCH models endogenously allow for time-varying shifts in the parameters of the conditional variance equation. The most general form of the model that we consider is a double smooth-transition model, the STAR-STARCH model, which permits not only the conditional variance, but also the mean, to be a function of a smooth-transition term. The threshold ARCH model, the Markov-ARCH model and the standard ARCH model are special cases of our STARCH model. We also develop Lagrange multiplier tests of the hypothesis that the smooth-transition term in the conditional variance is zero. We apply our STARCH model to excess Treasury bill returns. We find some evidence of a smooth transition in excess returns, but in contrast to previous studies, we find almost no evidence of volatility persistence once we allow for smooth transitions in the conditional variance. Thus, the apparent persistence in the conditional variance reported by many researchers could be a mere statistical artifact. We conduct in-sample tests comparing STARCH models to nested competitors; these suggest that STARCH models hold promise for improved predictions. Finally, we describe further extensions of the STARCH model and suggest issues in finance to which they might profitably be applied.

Can the Volatility of the Federal Funds Rate Explain the Time-Varying Risk Premium in Treasury Bill Returns?

The implementation of monetary policy through financial markets is widely believed to be an important factor affecting the return on financial assets, particularly the return on short-term government debt. This paper assesses the effects of shocks to monetary policy on Treasury bill returns by fitting a factor-ARCH model with a candidate factor based on innovations in the federal funds rate. We find that positive policy shocks significantly reduce Treasury bill returns and significantly increase the volatility of Treasury bill returns, but that the volatility of policy shocks does not explain the time-varying risk premia in Treasury bill returns.

Economic Tracking Portfolios

An economic tracking portfolio is a portfolio of assets with returns that track an economic variable. Monthly returns on stocks and bonds are useful in forecasting post-war US output, consumption, labor income, inflation, stock returns, bond returns, and Treasury bill returns. These forecasting relationships define portfolios that track market expectations about future economic variables. Using tracking portfolio returns as instruments for future economic variables substantially raises the estimated sensitivity of asset prices to news about future economic variables. Out-of-sample results show that tracking portfolios are useful in forecasting macroeconomic variables and hedging economic risk.

Is the real interest rate unstable? Some new evidence

Prior studies typically report that real Treasury bill returns have a unit root. The unit-root findings are not consistent with the long-run Fisher effect and consumptionbased asset pricing models. This study examines a data set of ex ante real returns on US Treasury bills and commercial papers. The statistical analysis employs a new modified Dickey-Fuller test, whc has better power than standard unit-root tests. In contrast to previous findings, strong evidence of stationarity is found for all the real return series under examination. Implications of the results are discussed.

Why Do Markets Move Together? An Investigation of U.S.‐Japan Stock Return Comovements

ABSTRACTThis article explores the fundamental factors that affect cross‐country stock return correlations. Using transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE‐traded American Depository Receipts (ADRs) and a matched‐sample portfolio of U. S. stocks. We find that U. S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad‐based market indices (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations.

Why do Markets Move Together? An Investigation of U.S.-Japan Stock Return Comovements using ADRS

This study explores empirically the fundamental factors that influence intraday and overnight cross country stock return covariances. Using the Institute for Study of Securities Markets (ISSM) transactions data from 1988 to 1992, we construct overnight and intraday returns for a portfolio of Japanese stocks using their NYSE-traded American Depository Receipts and a matched-sample portfolio of U.S. stocks. A simple valuation framework is developed to examine cross-country correlations of returns and to discriminate between competitive and global information shocks to future expected and unexpected dividends and discount rates. We find that U.S. macroeconomic news announcements, shocks to the yen/dollar foreign exchange rate and Treasury bill returns and industry effects have no measurable influence on U.S. and Japanese return correlations. However, large shocks to broad-based market indexes (Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both the magnitude and persistence of the return correlations. The implications for international diversification strategies are discussed.

Failed delivery and daily Treasury bill returns

If the seller of a Treasury bill does not provide timely and correct delivery instructions to the clearing bank, the bank does not deliver the security. Furthermore, the seller is not paid until this “failed delivery” is rectified. Since the purchase price is not changed, these “fails” generate interest-free loans from the seller to the buyer. This article studies the effect of failed delivery on Treasury bill prices. We find that investors bid prices to a premium to reflect the possibility of obtaining the interest-free loans that fails represent. This premium is a function of the opportunity cost of the fail. We also find that the bid-ask spread varies directly with the length of the fail. We rule out that our results are due to liquidity premiums, or to a general weekly pattern in short-term interest rates or the bid-ask spread.

Modeling the term structure of interest rates under non-separable utility and durability of goods

The term structure relations implied by a model in which preferences are non-separable functions of the service flows from two goods are investigated. The parameters characterizing preferences are estimated and restrictions on the co-movements of consumptions and Treasury bill returns are examined. Both the durability of goods and the non-separability of preferences are important factors in explaining the time paths of individual returns, but there is substantial evidence against the cross-sectional restrictions implied by our model. Differences between sample mean returns are too large relative to the sample covariances of the return differences and the marginal utility of consumption.

INFLATION MEASUREMENT, INFLATION RISK, AND THE PRICING OF TREASURY BILLS

AbstractOne explanation for the high real interest rates on Treasury bills during the period from 1980 to 1985 is that the risk premium had risen. A procedure for testing this hypothesis is to apply the Black version of the capital asset pricing model to real Treasury bill returns. This paper examines that procedure in detail. The main conclusion is that nonstationarity and measurement error, which are always impediments to empirical implementation of the CAPM, are particularly difficult to handle when estimating changes in Treasury bill risk premiums. Furthermore, the behavior of the premium depends on the index used to measure inflation.