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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Risk Premium, Liquidity Premium, and Expectations Hypothesis in the Treasury Bill Market

Vol.19, No.2, June , 44–74



  •   (Department of Economics, Korea University)

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Abstract  

This paper examines whether the risk premium and the liquidity premium play an important role in explaining excess holding period return and whether two components can explain the empirical failure of expectations hypothesis. The paper finds from the study of U.S. Treasury Bill rates that the risk premium and the liquidity premium are important in explaining excess holding period return. However, the expectations hypothesis is not salvaged under the maintained hypothesis concerning the liquidity premium and risk premium although two premiums improve the forecastability of yield spread. The paper attributes the results to the possibility that the difference between the relative bid-ask spread of T-bill rates is not accurate measure for the time-varying liquidity.


Keywords
   Risk premium, Liquidity premium, Expectations hypothesis, Term structure

JEL classification codes
   E43, E44, C32
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