Changes in Expected Security Returns, Risk, and the Level of Interest Rates

By Wayne E. Ferson
1988| Working Paper No. 1004

Regressions of security returns on treasury bill rates implicitly indicate the behavior of conditional covariances with benchmark pricing variables. The information in one-month rates is sufficient to detect variation in the covariances for stocks and fixed-income securities, both in real and in nominal terms, over extended samples and within five-year subperiods. There is some evidence of changes in conditional “betas” associated with interest rate changes. The implicit evidence is confirmed, using some common empirical proxies in a general framework for time-varying conditional covariances.