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Bond Market Asymmetries across Recessions and Expansions: New Evidence on Risk Premia

Martin M. Andreasen (), Tom Engsted (), Stig V. Møller () and Magnus Sander ()
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Martin M. Andreasen: Aarhus University and CREATES, Postal: Aarhus University and CREATES, Department of Economics and Business Economics, Fuglesangs Alle 4, 8210 Aarhus V
Stig V. Møller: Aarhus University and CREATES, Postal: Aarhus University and CREATES, Department of Economics and Business Economics, Fuglesangs Alle 4, 8210 Aarhus V
Magnus Sander: Aarhus University and CREATES, Postal: Aarhus University and CREATES, Department of Economics and Business Economics, Fuglesangs Alle 4, 8210 Aarhus V

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: This paper provides new evidence on bond risk premia by conditioning the classic Campbell-Shiller regressions on the business cycle. In expansions, we find mostly positive intercepts and negative regression slopes, but the results are completely reversed in recessions with negative intercepts and positive regression slopes. We reproduce these coefficients in a term structure model with business cycle dependent loadings in the market price of risk. This model also predicts excess returns in the right direction during expansions and recessions, whereas the Gaussian affine term structure model predicts excess returns for medium- and long-term bonds with the wrong sign during recessions.

Keywords: Bond return predictability; Business cycle variation in excess returns; Market price of risk; Zero-lower bound; Unspanned macroeconomic risk. (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac, nep-sog and nep-upt
Date: 2016-08-30
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