Bond risk premiums at the zero lower bound

Martin M. Andreasen, Kasper Jørgensen and Andrew Meldrum

Journal of Econometrics, 2025, vol. 247, issue C

Abstract: We document that the spread between long- and short-term government bond yields is a stronger predictor of excess bond returns when the U.S. economy is at the zero lower bound (ZLB) than away from this bound. The Gaussian shadow rate model with a linear or quadratic shadow rate is unable to explain this change in return predictability. The same holds for the quadratic term structure model and the autoregressive gamma-zero model that also enforce the ZLB. In contrast, the linear-rational square-root model explains our new empirical finding because the model allows for unspanned stochastic volatility as seen in bond yields.

Keywords: Bond return predictability; Dynamic term structure models; Unspanned stochastic volatility (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:247:y:2025:i:c:s0304407624002902

DOI: 10.1016/j.jeconom.2024.105939

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