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Bond Risk Premia
John H. Cochrane,Monika Piazzesi +1 more
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In this paper, the authors run regressions of annual excess returns on forward rates and find that a single factor predicts 1-year excess return on 1-5 year maturity bonds with an R2 up to 43%.Abstract:
This paper studies time variation in expected excess bond returns. We run regressions of annual excess returns on forward rates. We find that a single factor predicts 1-year excess returns on 1-5 year maturity bonds with an R2 up to 43%. The single factor is a tent-shaped linear function of forward rates. The return forecasting factor has a clear business cycle correlation: Expected returns are high in bad times, and low in good times, and the return-forecasting factor forecasts long-run output growth. The return-forecasting factor also forecasts stock returns, suggesting a common time-varying premium for real interest rate risk. The return forecasting factor is poorly related to level, slope, and curvature movements in bond yields. Therefore, it represents a source of yield curve movement not captured by most term structure models. Though the return-forecasting factor accounts for more than 99% of the time-variation in expected excess bond returns, we find additional, very small factors that forecast equally small differences between long term bond returns, and hence statistically reject a one-factor model for expected returns.read more
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Presidential Address: Discount Rates
TL;DR: Discount-rate variation is the central organizing question of current asset-pricing research as discussed by the authors, and a survey of discount-rate theories and applications can be found in the survey.
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Expected Stock Returns and Variance Risk Premia
TL;DR: This article found that the difference between implied and realized variances, or the variance risk premium, is able to explain more than fifteen percent of the ex-post time series variation in quarterly excess returns on the market portfolio over the 1990 to 2005 sample period, with high premia predicting high (low) future returns.
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Forecasting the term structure of government bond yields
Francis X. Diebold,Canlin Li +1 more
TL;DR: In this paper, the authors use variations on the Nelson-Siegel exponential components framework to model the entire yield curve, period-by-period, as a three-dimensional parameter evolving dynamically.
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Macro Factors in Bond Risk Premia
Sydney C. Ludvigson,Serena Ng +1 more
TL;DR: This article investigated the relationship between forecastable variation in excess bond returns and macroeconomic fundamentals and found that "real" and "inflation" factors have important forecasting power for future excess returns on U.S. government bonds, above and beyond the predictive power contained in forward rates and yield spreads.
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Variable Rare Disasters: An Exactly Solved Framework for Ten Puzzles in Macro-Finance
TL;DR: In this article, the authors incorporate a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters.
References
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Large sample properties of generalized method of moments estimators
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An intertemporal capital asset pricing model
TL;DR: In this article, an intertemporal model for the capital market is deduced from portfolio selection behavior by an arbitrary number of investors who aot so as to maximize the expected utility of lifetime consumption and who can trade continuously in time.
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Business conditions and expected returns on stocks and bonds
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: For example, this paper found that expected returns on common stocks and long-term bonds contain a term or maturity premium that has a clear business-cycle pattern (low near peaks, high near troughs).
Posted Content
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TL;DR: The authors reviewed recent research that grapples with the question: What happens after an exogenous shock to monetary policy? They argue that this question is interesting because it lies at the center of a particular approach to assessing the empirical plausibility of structural economic models that can be used to think about systematic changes in monetary policy institutions and rules.