Reward-to-Risk Ratios in the Treasury-Bill Market.

We estimate the ex-ante reward per unit of spot-rate volatility (the reward-to-risk ratio) for U.S. Treasury bills on a monthly basis and find that these ratios vary predictably over time. Reward-to-risk ratios are positively autocorrelated; month-to-month changes in these ratios are negatively autocorrelated. Variation in these ratios contributes at least as much variation to ex-ante excess returns as does variation in interest-rate volatility. Because ex ante volatility and the rewards to volatility vary independently, variation in ex-ante premiums is greater than the variation attributable to changing volatility alone. Copyright 2001 by MIT Press.