EconPapers    
Economics at your fingertips  
 

Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

John Campbell (), Adi Sunderam and Luis Viceira ()

No 14701, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953--2009, it was unusually high in the early 1980''s and negative in the 2000''s, particularly in the downturns of 2000--02 and 2007--09. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by four state variables: the real interest rate, temporary and permanent components of expected inflation, and the ""nominal-real covariance"" of inflation and the real interest rate with the real economy. The last of these state variables enables the model to ...fit the changing covariance of bond and stock returns. Log bond yields and term premia are quadratic in these state variables, with term premia determined by the nominal-real covariance. The concavity of the yield curve - the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields - is a good proxy for the level of term premia. The nominal-real covariance has declined since the early 1980''s, driving down term premia.

JEL-codes: G0 G10 G11 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mac
Date: 2009-02
Note: AP IFM ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35) Track citations by RSS feed

Published as John Y. Campbell & Adi Sunderam & Luis M. Viceira, 2017. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," Critical Finance Review, vol 6(2), pages 263-301.

Downloads: (external link)
http://www.nber.org/papers/w14701.pdf (application/pdf)

Related works:
Journal Article: Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds (2017) Downloads
Working Paper: Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds (2008) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:14701

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w14701

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2019-10-16
Handle: RePEc:nbr:nberwo:14701