Bond Market Exposures to Macroeconomic and Monetary Policy Risks

Dongho Song

The Review of Financial Studies, 2017, vol. 30, issue 8, 2761-2817

Abstract: The paper estimates a model that allows for shifts in the aggressiveness of monetary policy and time variation in the distribution of macroeconomic shocks. These model features induce variations in the cyclical properties of inflation and the riskiness of bonds. The estimation identifies inflation as procyclical from the late 1990s, when the economy shifted toward aggressive monetary policy and experienced procyclical macroeconomics shocks. Since bonds hedge stock market risks when inflation is procylical, the stock-bond return correlation turned negative in the late 1990s. The risks of encountering countercyclical inflation in the future could lead to an upward-sloping yield curve, like in the data.Received September 11, 2016; editorial decision January 2, 2017 by Editor Stijn Van Nieuwerburgh.

JEL-codes: E32 E42 E43 E44 E52 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (54)

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Related works:
Working Paper: Bond Market Exposures to Macroeconomic and Monetary Policy Risks (2016)
Working Paper: Bond Market Exposures to Macroeconomic and Monetary Policy Risks (2014)
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