Detailed project information

When prices of stocks and other financial assets fluctuate wildly, investors look for a safe place to put their money. Government bonds (so-called ?treasuries?) from solid countries, such as Germany and the US, traditionally serve as such a safe haven. To emphasize the role of being the least risky asset available, the return on these bonds is often referred to as the ?riskfree rate?. However, this asset class is not completely free of risk. Treasury prices are not constant because the fixed cash-flows that will be received from the bond are discounted against unknown future interest rates. Changes in macroeconomic conditions spur changes in the outlook for interest rates, and thus affect treasury prices. During the recent period of uncertainty on financial markets demand for treasuries soared. There is an urgent need for accurate measurement of treasury riskiness to examine how much of this demand increase is actually justified.

I will study various aspects of risk measurement in the treasury market. While treasuries trade at a high frequency (many times a day), most investors and researchers evaluate them on a lower frequency basis (such as monthly). First, I will study whether considering both high- and low-frequency data at the same time improves measurement of treasury risk (using volatility). Second, I will examine whether the uncertainty of treasury prices at the intraday level surrounding macroeconomic news releases carries over to the lower frequency dimension and low-frequency models need to be adjusted for this. Third, I will model the relation between macroeconomic variables and treasuries each measured at different frequencies to improve volatility measurement of both. With the results of the project it will, among other theoretically and practically important implications, enable pension funds to compose an investment portfolio that correctly incorporates the riskiness of treasuries.