Bond Risk Premia, Priced Regime Shifts, and Macroeconomic Fundamentals

Constantino Hevia, Ivan Petrella and Martin Sola

No 200, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: In this paper, we develop and estimate an arbitrage-free model of bond prices in which the evolution of the risk factors and the parameters of the stochastic discountfactor are subject to occasional discrete changes in regimes. We show that the component of risk premia associated with regime shifts is related to the macroeconomic environment. In particular, the explicit pricing of regime shifts and the nonlinearities associated with the Markov switching model generates a strong connection betweenbond risk premia and the macroeconomy as summarized by variables such as inflation, industrial production, and unemployment.

Keywords: Yield Curve; Term structure of interest rates; Markov regime switching; Priced switching risk prem (search for similar items in EconPapers)
JEL-codes: C13 C22 E43 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-12
New Economics Papers: this item is included in nep-fmk
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https://rednie.eco.unc.edu.ar/files/DT/200.pdf (application/pdf)

Related works:
Working Paper: Bond risk premia, priced regime shifts, and macroeconomic fundamentals (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:200

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