The Yield Spread and Bond Return Predictability in Expansions and Recessions

Martin M Andreasen, Tom Engsted, Stig V Møller, Magnus Sander and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2021, vol. 34, issue 6, 2773-2812

Abstract: This paper uncovers that expected excess bond returns display a positive correlation with the slope of the yield curve (i.e., yield spread) in expansions but a negative correlation in recessions. We use a macro-finance term structure model with different market prices of risk in expansions and recessions to show that a very accommodating monetary policy in recessions is a key driver of this switch in return predictability.

JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (9)

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