The Yield Spread and Bond Return Predictability in Expansions and Recessions

TY - JOUR

T1 - The Yield Spread and Bond Return Predictability in Expansions and Recessions

AU - Andreasen, Martin Møller

AU - Engsted, Tom

AU - Møller, Stig Vinther

AU - Jensen, Magnus David Sander

PY - 2021/6

Y1 - 2021/6

N2 - This paper uncovers that expected excess bond returns display a positive correlation with the slope of the yield curve (i.e., yield spread) in expansions but a negative correlation in recessions. We use a macro-finance term structure model with different market prices of risk in expansions and recessions to show that a very accommodating monetary policy in recessions is a key driver of this switch in return predictability.

AB - This paper uncovers that expected excess bond returns display a positive correlation with the slope of the yield curve (i.e., yield spread) in expansions but a negative correlation in recessions. We use a macro-finance term structure model with different market prices of risk in expansions and recessions to show that a very accommodating monetary policy in recessions is a key driver of this switch in return predictability.

KW - EXPECTED RETURNS

KW - RATES

KW - RISK PREMIUMS

KW - SAMPLE

KW - SHIFTS

KW - TERM STRUCTURE

UR - http://www.scopus.com/inward/record.url?scp=85107807712&partnerID=8YFLogxK

U2 - 10.1093/rfs/hhaa107

DO - 10.1093/rfs/hhaa107

M3 - Journal article

SN - 0893-9454

VL - 34

SP - 2773

EP - 2812

JO - Review of Financial Studies

JF - Review of Financial Studies

IS - 6

ER -