Fiscal policy driven bond risk premia

Lorenzo Bretscher, Alex Hsu and Andrea Tamoni

Journal of Financial Economics, 2020, vol. 138, issue 1, 53-73

Abstract: Fiscal policy matters for bond risk premia. Empirically, government spending level and uncertainty predict bond excess returns, as well as term structure level and slope movements. Shocks to government spending level and uncertainty are also priced in the cross-section of bond and stock portfolios. Theoretically, government spending level shocks raise inflation when marginal utility is high, thus generating positive inflation risk premia (term structure level effect). Uncertainty shocks steepen the yield curve (slope effect), producing positive term premia. These effects are consistent with evidence from a structural vector autoregression. Asset pricing tests using model simulated data corroborate our empirical findings.

Keywords: Term structure; Bond risk premia; Fiscal policy; Uncertainty (search for similar items in EconPapers)
JEL-codes: E43 E62 G12 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X20301252
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:138:y:2020:i:1:p:53-73

DOI: 10.1016/j.jfineco.2020.04.010

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().