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Bond Risk Premiums at the Zero Lower Bound

Martin Møller Andreasen (), Kasper Jørgensen () and Andrew Meldrum ()
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Martin Møller Andreasen: University of Aarhus and CREATES, Postal: Department of Economics and Business Economics, University of Aarhus, Fuglesangs Allé 4, Building 2632, 212, 8210 Aarhus V, DK
Kasper Jørgensen: Board of Governors of the Federal Reserve System, Postal: Monetary and Financial Market Analysis Section, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue N.W., Washington, DC 20551, USA
Andrew Meldrum: Board of Governors of the Federal Reserve System, Postal: Monetary and Financial Market Analysis Section, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue N.W., Washington, DC 20551, USA

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

Abstract: This paper documents a significantly stronger relationship between the slope of the yield curve and future excess bond returns on Treasuries from 2008-2015 than before 2008. This new predictability result is not matched by the standard shadow rate model with Gaussian factor dynamics, but extending the model with regime-switching in the (physical) dynamics of the factors at the lower bound resolves this shortcoming. The model is also consistent with the downwards trend in surveys on short rate expectations at long horizons, but requires a break in the level of its factors to closely fit the low level of these surveys since 2015.

Keywords: Dynamic term structure model; bond return predictability; shadow rate model; structural break; regime-switching (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-fmk and nep-mac
Date: 2019-05-14
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