We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.
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13806.
Length: Date of creation: Feb 2008 Date of revision: Handle: RePEc:nbr:nberwo:13806
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John H. Cochrane & Monika Piazzesi, 2005.
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John H. Cochrane & Monika Piazzesi, 2002.
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NBER Working Papers
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Koijen, Ralph S.J. & Hemert, Otto Van & Nieuwerburgh, Stijn Van, 2009.
"Mortgage timing,"
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Garleanu, Nicolae Bogdan & Pedersen, Lasse Heje & Poteshman, Allen M, 2005.
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Nicolae Garleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2005.
"Demand-Based Option Pricing,"
NBER Working Papers
11843, National Bureau of Economic Research, Inc.
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Nicolae Gârleanu & Lasse Heje Pedersen & Allen M. Poteshman, 2009.
"Demand-Based Option Pricing,"
Review of Financial Studies,
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