An empirical analysis of term premiums using stochastic dominance

This paper examines term premiums in U.S. Treasury bill monthly holding period returns. Several techniques are employed to ascertain whether the observed term premiums are economically meaningful. No second order stochastic dominance is found in the first five-month maturities. When a riskless asset is assumed, the first two maturities are dominated. Therefore, we conclude that although there are statistically significant term premiums, they are not economically meaningful if there is no riskless borrowing and lending. The term premiums are economically meaningful in the sense that the longer maturities dominate the shorter maturities when a riskless asset is available.