Creator: Backus, David, Gregory, Alan, and Zin, Stanley E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 429 Abstract:
We compare the statistical properties of prices of U.S. treasury bills to those generated by a theoretical dynamic exchange economy with complete markets. We show that the model can account for neither the sign nor the magnitude of average risk premiums in forward prices and holding-period returns. The economy is also incapable of generating enough variation in risk premiums to account for rejections of the expectations hypothesis with treasury bill data. These conclusions add to the growing list of empirical deficiencies of the representative agent model of asset pricing.
Keyword: Expectations hypothesis, Forward prices, Holding-period returns, and Autoregressive heteroskedasticity Subject (JEL): G12 - Asset Pricing; Trading Volume; Bond Interest Rates and C61 - Optimization Techniques; Programming Models; Dynamic Analysis