Short-Run Bond Risk Premia

Philippe Mueller (), Andrea Vedolin () and Hao Zhou
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Andrea Vedolin: Questrom School of Business, Boston University, 595 Commonwealth Avenue, Boston 02215, MA, USA
Hao Zhou: PBC School of Finance, Tsinghua University, 43 Chengfu Road, Haidian District, Beijing 100083, P. R. China

Quarterly Journal of Finance (QJF), 2019, vol. 09, issue 03, 1-34

Abstract: In the short-run, bond risk premia exhibit pronounced spikes around major economic and financial crises. In contrast, long-term bond risk premia feature cyclical swings. We empirically examine the predictability of the market variance risk premium — a proxy of economic uncertainty — for bond risk premia and we show the strong predictive power for the one-month horizon that quickly recedes for longer horizons. The variance risk premium is largely orthogonal to well-established bond return predictors — forward rates, jumps, and macro variables. We rationalize our empirical findings in an equilibrium model of uncertainty about consumption and inflation which is coupled with recursive preferences. We show that the model can quantitatively explain the levels of bond and variance risk premia as well as the predictive power of the variance risk premium, while jointly matching salient features of other asset prices.

Keywords: Variance risk premium; bond risk premia; expectations hypothesis; inflation dynamics; economic uncertainty (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Short run bond risk premia (2011)
Working Paper: Short Run Bond Risk Premia (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:qjfxxx:v:09:y:2019:i:03:n:s2010139219500113

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DOI: 10.1142/S2010139219500113

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