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Short-run bond risk premia

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Mueller, Philippe, Vedolin, Andrea and Zhou, Hao (2019) Short-run bond risk premia. Quarterly Journal of Finance, 9 (3). 1950011. doi:10.1142/S2010139219500113

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Official URL: http://dx.doi.org/10.1142/S2010139219500113

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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 ̄ndings in an equilibrium model of uncertainty about consumption and inforation 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.

Item Type: Journal Article
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Risk, Financial risk, Financial crises, Bonds
Journal or Publication Title: Quarterly Journal of Finance
Publisher: World Scientific
ISSN: 2010-1392
Official Date: 12 June 2019
Dates:
DateEvent
12 June 2019Published
2 February 2019Accepted
Volume: 9
Number: 3
Article Number: 1950011
DOI: 10.1142/S2010139219500113
Status: Peer Reviewed
Publication Status: Published
Publisher Statement: Electronic version of an article published as Quarterly Journal of Finance, 9 (3). 1950011. doi:10.1142/S2010139219500113 © 2019 World Scientific Publishing Company https://www.worldscientific.com/doi/abs/10.1142/S2010139219500113
Access rights to Published version: Restricted or Subscription Access
RIOXX Funder/Project Grant:
Project/Grant IDRIOXX Funder NameFunder ID
UNSPECIFIEDLondon School of Economics and Political Sciencehttp://dx.doi.org/10.13039/100011326
UNSPECIFIEDBritish Academyhttp://dx.doi.org/10.13039/501100000286

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