Can the volatility of the federal funds rate explain the time-varying risk premium in treasury bill returns?

The implementation of monetary policy through financial markets is widely believed to be an important factor affecting the return on financial assets, particularly the return on short-term government debt. This paper assesses the effects of shocks to monetary policy on Treasury bill returns by fitting a factor-ARCH model with a candidate factor based on innovations in the federal Funds rate. We find that positive policy shocks significantly reduce Treasury bill returns and significantly increase the volatility of Treasury bill returns, but that the volatility of policy shucks does not explain the time-varying risk premia in Treasury bill returns.