Working Paper: NBER ID: w26369
Authors: Valentin Haddad; David A. Sraer
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 supporting this view, but also discuss several challenges to this interpretation.
Keywords: bond risk premia; banks; interest rate risk; treasury bonds
JEL Codes: G00; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| banks' balance sheet exposure to fluctuations in interest rates (E43) | excess treasury bond returns (G12) |
| average income gap (D31) | excess treasury bond returns (G12) |
| banks' balance sheet exposure to fluctuations in interest rates (E43) | average income gap (D31) |
| average income gap (D31) | banks' balance sheet exposure to fluctuations in interest rates (E43) |