BFS 2002

Plenary Address

The Market Prices of Risks in Fixed Income Markets

Kenneth Singleton, Qiang Dai

This talk surveys the theoretical specifications of the market prices of factor risks (MPRs)in dynamic term structure models (DTSMs), and explores in depth the empirical implications of alternative specifications. Particular attention is given to how the choice of MPRs affects a DTSM's ability to match the conditional means and variances of excess returns on bonds. Additionally, we decompose the effects of the risk factors on bond yields into their effects on expected future short-term rates and market risk premiums. Finally, we relate the risk factors and the dynamic properties of the MPRs to macroeconomic developments.