Short run bond risk premia

Philippe Mueller (), Andrea Vedolin and Hao Zhou

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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 almost entirely disappears for horizons above one year. The variance risk premium is largely orthogonal to well-established bond return predictors-forward rates, jumps, yield curve factors, 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)
JEL-codes: E43 E44 G12 G13 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2011-06-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://eprints.lse.ac.uk/119065/ Open access version. (application/pdf)

Related works:
Journal Article: Short-Run Bond Risk Premia (2019)
Working Paper: Short Run Bond Risk Premia (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:119065

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