The Banking View of Bond Risk Premia
نویسندگان
چکیده
Banks’ exposure to fluctuations in interest rates strongly forecasts excess Treasury bond returns. This result is consistent with a bank-centric view of the market for interest rate risk. Banks’ activities — accepting deposits and making loans — naturally exposes their balance sheets to changes in interest rates. In equilibrium, the bond risk premium compensates banks for bearing these fluctuations: for instance, when consumers demand for fixed rate mortgages increases, banks have to scale up their exposure to interest rate risk and are compensated by an increase in bond risk premium. A key insight is that the net exposure of banks, rather than quantities of particular types of loans or deposits, reveals the risk premium. ∗Haddad: [email protected]; Sraer: [email protected] We gratefully acknowledge comments and suggestions from Augustin Landier, David Thesmar, Anna Cieslak, Giorgia Piacentino as well as seminar participants at Kellogg, Princeton, the University of Michigan, and the UNC Junior Faculty Roundtable. Charles Boissel provided excellent research assistance. All remaining errors are our own.
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