TY - JOUR
T1 - Bond risk premiums at the zero lower bound
AU - Andreasen, Martin M.
AU - Jørgensen, Kasper
AU - Meldrum, Andrew
N1 - Publisher Copyright:
© 2024 Elsevier B.V.
PY - 2025/1
Y1 - 2025/1
N2 - We document that the spread between long- and short-term government bond yields is a stronger predictor of excess bond returns when the U.S. economy is at the zero lower bound (ZLB) than away from this bound. The Gaussian shadow rate model with a linear or quadratic shadow rate is unable to explain this change in return predictability. The same holds for the quadratic term structure model and the autoregressive gamma-zero model that also enforce the ZLB. In contrast, the linear-rational square-root model explains our new empirical finding because the model allows for unspanned stochastic volatility as seen in bond yields.
AB - We document that the spread between long- and short-term government bond yields is a stronger predictor of excess bond returns when the U.S. economy is at the zero lower bound (ZLB) than away from this bound. The Gaussian shadow rate model with a linear or quadratic shadow rate is unable to explain this change in return predictability. The same holds for the quadratic term structure model and the autoregressive gamma-zero model that also enforce the ZLB. In contrast, the linear-rational square-root model explains our new empirical finding because the model allows for unspanned stochastic volatility as seen in bond yields.
KW - Bond return predictability
KW - Dynamic term structure models
KW - Unspanned stochastic volatility
UR - http://www.scopus.com/inward/record.url?scp=85214331730&partnerID=8YFLogxK
U2 - 10.1016/j.jeconom.2024.105939
DO - 10.1016/j.jeconom.2024.105939
M3 - Journal article
AN - SCOPUS:85214331730
SN - 0304-4076
VL - 247
JO - Journal of Econometrics
JF - Journal of Econometrics
M1 - 105939
ER -