Article1989

Changes in Expected Security Returns, Risk, and the Level of Interest Rates

247 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

ABSTRACT Regressions of security returns on treasury bill rates provide insight about the behavior of risk in rational asset pricing models. The information in one‐month bill rates implies time variation in the conditional covariances of portfolios of stocks and fixed‐income securities with benchmark pricing variables, over extended samples and within five‐year subperiods. There is evidence of changes in conditional “betas” associated with interest rates. Consumption and stock market data are examined as proxies for marginal utility, in a general framework for asset pricing with time‐varying conditional covariances.

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References

1979Martingales and arbitrage in multiperiod securities markets 1977Asset returns and inflation 1979An intertemporal asset pricing model with stochastic consumption and investment opportunities 1985Stock Returns and the Term Structure 1986Predicting returns in the stock and bond markets 1976The Valuation of Uncertain Income Streams and the Pricing of Options 1983Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns 1987The Role of Conditioning Information in Deducing Testable Restrictions Implied by Dynamic Asset Pricing Models

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