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Bond Risk Premiums at the Zero Lower Bound

Author

Listed:
  • Martin Møller Andreasen

    (University of Aarhus and CREATES)

  • Kasper Jørgensen

    (Board of Governors of the Federal Reserve System)

  • Andrew Meldrum

    (Board of Governors of the Federal Reserve System)

Abstract

This paper documents a significantly stronger relationship between the slope of the yield curve and future excess bond returns on Treasuries from 2008-2015 than before 2008. This new predictability result is not matched by the standard shadow rate model with Gaussian factor dynamics, but extending the model with regime-switching in the (physical) dynamics of the factors at the lower bound resolves this shortcoming. The model is also consistent with the downwards trend in surveys on short rate expectations at long horizons, but requires a break in the level of its factors to closely fit the low level of these surveys since 2015.

Suggested Citation

  • Martin Møller Andreasen & Kasper Jørgensen & Andrew Meldrum, 2019. "Bond Risk Premiums at the Zero Lower Bound," CREATES Research Papers 2019-10, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:create:2019-10
    as

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    File URL: https://repec.econ.au.dk/repec/creates/rp/19/rp19_10.pdf
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    References listed on IDEAS

    as
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    5. Martin M. Andreasen & Tom Engsted & Stig V. Møller & Magnus Sander, 2016. "Bond Market Asymmetries across Recessions and Expansions: New Evidence on Risk Premia," CREATES Research Papers 2016-26, Department of Economics and Business Economics, Aarhus University.
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    More about this item

    Keywords

    Dynamic term structure model; bond return predictability; shadow rate model; structural break; regime-switching;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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