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

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.