Market prices of risk question

srioae · November 5th, 2010, 11:15 am

You think you understand something and then it bites you.Market price of risk in interest rates is (for most times) negative. This results in real world prices which are higher than risk neutral. If this is the case won't yields be lower in under real world pricing? (and higher in risk neutral?) This would suggest an investor isn't rewarded for holding risk which is what i would like your thoughts on.I've read FAQ but it doesn't seem to clear this up.Thanks

daveangel · November 5th, 2010, 5:58 pm

its the other way round - higher market price of risk in IR means higher yield and lower bond prices.