Excess Returns and Risk at the Long End of the Treasury Market: An Egarch‐m Approach

In this paper we model weekly excess returns of ten‐year Treasury notes and long‐term Treasury bonds from 1968 through 1993 using an exponential generalized autoregressive conditional heteroskedasticity in mean (EGARCH‐M) approach. The results indicate the presence of conditional heteroskedasticity and a strong tendency for the ex‐ante volatility of excess returns to increase more following negative excess return innovations compared with positive innovations of equal magnitude. In addition, increases in ex‐ante volatility are associated in some subperiods with rising excess returns on longer‐term instruments, although the slope of the yield curve and lagged excess returns generally remain significant predictors of excess returns.