Journal of Finance Vol. 75 No. 5 2020

The Banking View of Bond Risk Premia

Valentin Haddad^1,2; David Sraer^1,3

¹ National Bureau of Economic Research · ² University of California, Los Angeles · ³ Council of Independent Colleges

Abstract

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 that support this view, but also discuss several challenges to this interpretation.

DOI

10.1111/jofi.12949

Volume

75

Issue

5

Pages

2465-2502

Language

en

Sources

bibtex:phds-export.bib crossref openalex

Cite

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