Fabio Moneta

Economic Risk Premia in the Fixed Income Markets: The Intra-Day Evidence

We use intra-day data to precisely estimate risk premia of portfolios mimicking scheduled macroeconomic announcements. Average risk premia are consistently positive (negative) for macro variables affecting positively (negatively) bond prices. Mimicking-portfolio Sharpe ratios are remarkably similar (in absolute value) across announcements, consistent with a single economic-news factor driving returns at announcement times. The premium associated with the economic-news factor is time-varying, increasing (decreasing) with the level of interest rates (economic activity), and mainly earned before announcement releases and during inflation announcements. Economic-news betas explain bond risk premia at least as well as short-rate betas.

The Life Cycle of Beta

We document a robust pattern of beta declining over the age of a firm. We find that changes in systematic risk via firm characteristics and life-cycle stages are insufficient to explain this pattern. Moreover, standard proxies for the quantity and quality of information also explain this pattern only partially. To fully explain this pattern we rely on the increasingly important role of familiarity in financial decision making: familiarity is a determinant of beta and firm age is a proxy for the degree of familiarity that investors feel toward individual stocks. To illustrate the implication of our findings, we document that when we control for firm age there is support for the CAPM and the use of beta as input for the cost of equity capital calculation.