Bond supply and excess bond returns

Robin Greenwood and Dimitri Vayanos

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds’ excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.

JEL-codes: E43 E52 G11 G12 H63 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2008-02-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

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http://eprints.lse.ac.uk/24425/ Open access version. (application/pdf)

Related works:
Journal Article: Bond Supply and Excess Bond Returns (2014)
Working Paper: Bond Supply and Excess Bond Returns (2008)
Working Paper: Bond Supply and Excess Bond Returns (2008)
Working Paper: Bond Supply and Excess Bond Returns (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24425

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