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

Event

Bronfman Building Room 002, 1001 rue Sherbrooke Ouest, Montreal, QC, H3A 1G5, CA

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