Skewness Risk and Bond Prices

B-Tier
Journal: Journal of Applied Econometrics
Year: 2017
Volume: 32
Issue: 2
Pages: 379-400

Authors (1)

Francisco Ruge‐Murcia (not in RePEc)

Score contribution per author:

2.011 = (α=2.01 / 1 authors) × 1.0x B-tier

α: calibrated so average coauthorship-adjusted count equals average raw count

Abstract

This paper uses extreme value theory to study the implications of skewness risk for nominal loan contracts in a production economy. Productivity and inflation innovations are drawn from generalized extreme value distributions. The model is solved using a third‐order perturbation and estimated by the simulated method of moments. Results show that the data reject the hypothesis that innovations are drawn from normal distributions and favor instead the alternative that they are drawn from asymmetric distributions. Estimates indicate that skewness risk accounts for 12% of the risk premia and reduces bond yields by approximately 55 basis points. For a bond that pays 1 dollar at maturity, the adjustment factor associated with skewness risk ranges from 0.15 cents for a 3‐month bond to 2.05 cents for a 5‐year bond. Copyright © 2016 John Wiley & Sons, Ltd.

Technical Details

RePEc Handle
repec:wly:japmet:v:32:y:2017:i:2:p:379-400
Journal Field
Econometrics
Author Count
1
Added to Database
2026-01-29