IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v106y2025ics1057521925005526.html
   My bibliography  Save this article

On the time-varying relation between monetary policy uncertainty and bond risk premia

Author

Listed:
  • Li, Luyang
  • Yin, Ximing
  • Yu, Deshui

Abstract

This paper examines the time-varying relationship between monetary policy uncertainty (MPU) and bond excess returns. To do so, we introduce a nonparametric time-varying coefficient predictive regression model for bond returns, and employ a kernel-based two-step method to estimate the time-varying coefficients. Next, we apply the methodologies to analyze the dynamic forecasting relationship between zero-coupon bond returns and MPU from 1985 to 2022. We find that MPU significantly and positively predicts bond returns in over 75% of the sample period, with the strongest effect observed in 2005. Thus, the expectations hypothesis is only transiently valid. After controlling for the shape of the yield curve, MPU still retains its ability to predict bond returns in 50% to 80% of the sample period. Our conclusions are robust to the so-called embedded endogeneity. Additionally, we find that bond excess returns are less responsive to MPU during periods of high economic activities and are more responsive during periods of low economic activities.

Suggested Citation

  • Li, Luyang & Yin, Ximing & Yu, Deshui, 2025. "On the time-varying relation between monetary policy uncertainty and bond risk premia," International Review of Financial Analysis, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:finana:v:106:y:2025:i:c:s1057521925005526
    DOI: 10.1016/j.irfa.2025.104465
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521925005526
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2025.104465?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:106:y:2025:i:c:s1057521925005526. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.