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An Equilibrium Model of Bond Pricing and a Test of Market Efficiency

Published online by Cambridge University Press:  06 April 2009

Michael J. Brennan  and
Eduardo S. Schwartz
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Extract

In two previous and related papers ([3], [4]), the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on Canadian government bonds for the period 1964 to 1979. This paper reports the results of applying a similar model to the pricing of U.S. government bonds for the period 1958–1979 using data from the CRSP Government Bond File. The paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds: the data reveal a strong relation between price prediction errors and subsequent bond returns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 17 , Issue 3 , September 1982 , pp. 301 - 329
Copyright
Copyright © School of Business Administration, University of Washington 1982

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