Consumption volatility, production volatility, spot-rate volatility, and the returns on treasury bills and bonds

The study documents a relation between the expected holding-period premiums on Treasury bills and the ex ante conditional volatilities of consumption, spot (one-month) interest rate, and industrial production. A model portraying the relation as a risk and return phenomenon is presented and tested. Consistent with the model, the coefficients of the relation appear to depend on the sensitivity of the realized premium to the ex post shocks in consumption, industrial production, and the spot rate. The model fits the data better than the traditional term premium models.