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Bond Market Asymmetries across Recessions and Expansions: New Evidence on Risk Premia

Listed author(s):
  • Martin M. Andreasen

    ()

    (Aarhus University and CREATES)

  • Tom Engsted

    ()

    (Aarhus University and CREATES)

  • Stig V. Møller

    ()

    (Aarhus University and CREATES)

  • Magnus Sander

    ()

    (Aarhus University and CREATES)

This paper provides new evidence on bond risk premia by conditioning the classic Campbell-Shiller regressions on the business cycle. In expansions, we find mostly positive intercepts and negative regression slopes, but the results are completely reversed in recessions with negative intercepts and positive regression slopes. We reproduce these coefficients in a term structure model with business cycle dependent loadings in the market price of risk. This model also predicts excess returns in the right direction during expansions and recessions, whereas the Gaussian affine term structure model predicts excess returns for medium- and long-term bonds with the wrong sign during recessions.

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File URL: ftp://ftp.econ.au.dk/creates/rp/16/rp16_26.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series CREATES Research Papers with number 2016-26.

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Length: 48
Date of creation: 30 Aug 2016
Handle: RePEc:aah:create:2016-26
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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