Bond risk premiums at the zero lower bound

Martin M. Andreasen; Kasper Jørgensen; Andrew Meldrum

doi:10.1016/j.jeconom.2024.105939

Bond risk premiums at the zero lower bound

Martin M. Andreasen^*, Kasper Jørgensen, Andrew Meldrum

^*Corresponding author for this work

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaper › Journal article › Research › peer-review

Abstract

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.

Original language	English
Article number	105939
Journal	Journal of Econometrics
Volume	247
ISSN	0304-4076
DOIs	https://doi.org/10.1016/j.jeconom.2024.105939
Publication status	Published - Jan 2025

Keywords

Bond return predictability
Dynamic term structure models
Unspanned stochastic volatility

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10.1016/j.jeconom.2024.105939

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title = "Bond risk premiums at the zero lower bound",

abstract = "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.",

keywords = "Bond return predictability, Dynamic term structure models, Unspanned stochastic volatility",

author = "Andreasen, {Martin M.} and Kasper J{\o}rgensen and Andrew Meldrum",

note = "Publisher Copyright: {\textcopyright} 2024 Elsevier B.V.",

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doi = "10.1016/j.jeconom.2024.105939",

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AU - Jørgensen, Kasper

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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

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VL - 247

JO - Journal of Econometrics

JF - Journal of Econometrics

M1 - 105939

ER -

Bond risk premiums at the zero lower bound

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Keywords

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