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Desmarais Global Finance Research Centre National Bank Seminar Series - Skewness Risk and Bond Prices

Event

5 Sep 2014 10:00
to
11:30
Bronfman Building : Room 002, 1001 rue Sherbrooke Ouest Montreal Quebec Canada , H3A 1G5

Desmarais Global Finance Research Centre National Bank Seminar Series presents

Skewness Risk and Bond Prices

Francisco Ruge-Murcia
Department of Economics, McGill University

Abstract:

This paper uses extreme value theory to the study the implications of skewness risk for nominal loan contracts in a production economy. Productivity and inflation innovations are modeled using the generalized extreme value (GEV) distribution. The model is solved using a third-order perturbation and estimated by the simulated method of moments. Results show that the U.S. data reject the hypothesis that productivity and inflation innovations are drawn from a normal distribution and favor instead the alternative that they are drawn from an asymmetric distribution. Estimates indicate that skewness risk accounts for 10 percent of the risk premia and has a price of 0.6percent per year. Despite the fact that bonds are nominal, most of the priced risk is consumption risk.

Date: September 5, 2014
Time: 10:00 am - 11:30 am
Location: Room 002, Bronfman Building

Source Site: /desautels