Document Type

Article

Publication Date

1999

Journal or Book Title

The Review of Financial Studies

Volume

12

Issue

3

First Page

631

Last Page

642

DOI

10.1093/rfs/12.3.631

Abstract

This article uses bond market data to empirically test the asset pricing model of Kazemi (1992). According to this model the rate of return on a long-term, pure-discount, default-free bond will be perfectly correlated with changes in the marginal utility of the representative investor. The covariability between financial asset returns and returns on such a bond can therefore serve as a measure of the riskiness of assets. The aim of this study is to determine whether the model can explain cross-sectional differences in the monthly returns of bonds with different maturity dates. We estimate and test the restrictions imposed by the model on returns of default-free bonds, while allowing the conditional distribution of bond returns to be time varying. The model is rejected during the full sample period (1973-1995) and the subperiod (1973-1980) when the Federal Reserve's focus is on interest rates, while the model is not rejected during the subperiod (1981-1995) when the Federal Reserve's focus is on money supply.

Comments

This is a preprint of an article published in The Review of Financial Studies. © 1999 The Society for Financial Studies. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. doi:10.1093/rfs/12.3.631.

Copyright Owner

The Society for Financial Studies

Language

en

File Format

application/pdf

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