Disaster risk matters in the bond market

Hao Su, Chengwei Ying and Xiaoneng Zhu

Finance Research Letters, 2022, vol. 47, issue PA

Abstract: We propose a rare disaster risk indicator and study its predictive power on the returns of U.S. Treasury bonds. The rare disaster risk factor is extracted from rare disaster concern proxies using partial least square method. Empirical results indicate that disaster risk significantly predicts time-varying bond risk premium. The predictive power is significant both in- and out-of-sample. Furthermore, the spanning test results suggest that information content of disaster risk indicator is not spanned by the current yield curve.

Keywords: Rare disaster risk; Return predictability; Yield curve; Bond risk premium (search for similar items in EconPapers)
JEL-codes: C53 E43 G12 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612322000800

DOI: 10.1016/j.frl.2022.102764

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