Correlations between the Market Price of Interest Rate Risk and Bond Yields


  • Takashi Yasuoka Graduate School of Engineering Management, Shibaura Institute of Technology



Correlation analysis, Financial policy-making, Interest rate model, Interest-rate-risk management, Market price of risk, Potential future exposure, Risk premium, Solvency risk, U.S. Treasury yields, Hull-White model


This paper examines empirical properties of the market price of interest rate risk, focusing on the relation between the price and interest rates. We briefly summarize how the market price of risk is estimated, and introduce the positive slope model to explain our empirical observation. The market price of risk is estimated for the U.S. Treasury market, 1970-2014, using the Hull–White model. We test the correlation between the market price of interest rate risk and bond yields. The results are that the yield change and term spreads are significantly correlated with the market price of risk, but the initial yields are not correlated with that. These results are theoretically interpreted by a mathematical model, and serve as a valuable reference for risk management as well as for study of financial policy.


Board of Governors of the Federal Reserve System. 2016. Economic Research, Retrieved on 1 Mar. 2016.
Brace, Alan, Dariusz Gatarek and Marek Musiela. 1997. ""The Market Model of Interest Rate Dynamics"", Mathematical Finance 7:127–155.
Cheridito, Patrick, Damir Filipovi? and Robert L. Kimmel. 2007. ""Market Price of Risk Specifications for Affine Models: Theory and Evidence"", Journal of Financial Economics, 83(1):123-170.
De Jong, Frank. 2000. ""Time Series and Cross-section Information in Affine Term-structure Models"", Journal of Business & Economic Statistics, 18(3):300-314.
De Jong, Frank and Pedoro Santa-Clara. 1999. ""The Dynamics of the Forward Interest Rate Curve: A Formulation with State Variables"", Journal of Financial and Quantitative Analysis, 34(01):131-157.
Duffee, Gregory R. 2002. ""Term Premia and Interest Rate Forecasts in Affine Models"", Journal of Finance, 57(1):405-443.
Heath David, Robert Jarrow and Andrew Morton. 1992. ""Bond Pricing and the Term Structure of Interest Rates: A New Methodology"", Econometrica, 61:77-105.
Hull, John and Alan White. 1990. ""Pricing Interest-rate Derivative Securities"", The Review of Financial Studies, 3:573-592.
Jamshidian, Farshid. 1997. ""LIBOR and Swap Market Models and Measures"", Finance and Stochastics 1:293–330.
Litterman, Robert and Jose Scheinkman. 1991. ""Common Factors Affecting Bond Returns"", Journal of Fixed Income, 1(1):54-61.
Munk, Claus. 2011. Fixed Income Modelling. Oxford: Oxford University Press.
Musiela, Marek and Marek Rutkowski. 1997. ""Continuous-time Term Structure Models: Forward Measure Approach"", Finance and Stochastics 1:261–291.
Shreve, Steven E. 2004. Stochastic Calculus for Finance II: Continuous-time Models. New York: Springer.
Stanton, Richard. 1997. ""A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk"", J. of Finance, 52:1973-2002.
Yasuoka, Takashi. 2013. ""LIBOR Market Model under the Real-world Measure"", Int. J. Theoretical and Applied Finance, 16(4):1350024(18pages).
Yasuoka, Takashi. 2015a. ""Interest-rate Simulation under the Real-world Measure within a Gaussian HJM Framework"", Quantitative Finance Letters, 3(1):10-16.
Yasuoka, Takashi. 2015b. Interest Rate Modeling for Risk Management: Market Price of Interest Rate Risk, Sharjah: Bentham.




How to Cite

Yasuoka, T. (2017). Correlations between the Market Price of Interest Rate Risk and Bond Yields. Journal of Reviews on Global Economics, 6, 208–217.



Special Issue - Monetary Policy in a Post-Crisis World: Experiences and Practices