IDEAS home Printed from https://ideas.repec.org/p/fmg/fmgdps/dp699.html
   My bibliography  Save this paper

Bond Variance Risk Premia

Author

Listed:
  • Philippe Mueller

    ()

  • Andrea Vedolin

    ()

  • Yu-min Yen

    ()

Abstract

Using data from 1983 to 2010, we propose a new fear measure for Treasury markets, akin to the VIX for equities, labeled TIV. We show that TIV explains one third of the time variation in fund- ing liquidity and that the spread between the VIX and TIV captures flight to quality. We then construct Treasury bond variance risk premia as the difference between the implied variance and an expected variance estimate using autoregressive models. Bond variance risk premia display pronounced spikes during crisis periods. We show that variance risk premia encompass a broad spectrum of macroeconomic uncertainty. Uncertainty about the nominal and the real side of the economy increase variance risk premia but uncertainty about monetary policy has a strongly neg- ative effect. We document that bond variance risk premia predict excess returns on Treasuries, stocks, corporate bonds and mortgage-backed securities, both in-sample and out-of-sample. Fur- thermore, this predictability is not subsumed by other standard predictors.

Suggested Citation

  • Philippe Mueller & Andrea Vedolin & Yu-min Yen, 2012. "Bond Variance Risk Premia," FMG Discussion Papers dp699, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp699
    as

    Download full text from publisher

    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp699.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Casassus, Jaime & Collin-Dufresne, Pierre & Goldstein, Bob, 2005. "Unspanned stochastic volatility and fixed income derivatives pricing," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2723-2749, November.
    2. Bekaert, Geert & Hoerova, Marie & Lo Duca, Marco, 2013. "Risk, uncertainty and monetary policy," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 771-788.
    3. Corsi, Fulvio & Pirino, Davide & Renò, Roberto, 2010. "Threshold bipower variation and the impact of jumps on volatility forecasting," Journal of Econometrics, Elsevier, vol. 159(2), pages 276-288, December.
    4. Philippe Mueller & Andrea Vedolin & Hao Zhou, 2011. "Short Run Bond Risk Premia," FMG Discussion Papers dp686, Financial Markets Group.
    5. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November.
    6. Jean-Sébastien Fontaine & René Garcia, 2012. "Bond Liquidity Premia," Review of Financial Studies, Society for Financial Studies, vol. 25(4), pages 1207-1254.
    7. Bollerslev, Tim & Gibson, Michael & Zhou, Hao, 2011. "Dynamic estimation of volatility risk premia and investor risk aversion from option-implied and realized volatilities," Journal of Econometrics, Elsevier, vol. 160(1), pages 235-245, January.
    8. Elyès Jouini & Clotilde Napp, 2007. "Consensus Consumer and Intertemporal Asset Pricing with Heterogeneous Beliefs," Review of Economic Studies, Oxford University Press, vol. 74(4), pages 1149-1174.
    9. Busch, Thomas & Christensen, Bent Jesper & Nielsen, Morten Ørregaard, 2011. "The role of implied volatility in forecasting future realized volatility and jumps in foreign exchange, stock, and bond markets," Journal of Econometrics, Elsevier, vol. 160(1), pages 48-57, January.
    10. Lieven Baele, 2010. "The Determinants of Stock and Bond Return Comovements," Review of Financial Studies, Society for Financial Studies, vol. 23(6), pages 2374-2428, June.
    11. Lieven Baele & Geert Bekaert & Koen Inghelbrecht, 2007. "The determinants of stock and bond return comovements," Working Paper Research 119, National Bank of Belgium.
    12. repec:dau:papers:123456789/78 is not listed on IDEAS
    13. Joost Driessen & Pascal J. Maenhout & Grigory Vilkov, 2009. "The Price of Correlation Risk: Evidence from Equity Options," Journal of Finance, American Finance Association, vol. 64(3), pages 1377-1406, June.
    14. Caio Almeida & Jeremy J. Graveline & Scott Joslin, 2005. "Do Options Contain Information About Excess Bond Returns?," IBMEC RJ Economics Discussion Papers 2005-04, Economics Research Group, IBMEC Business School - Rio de Janeiro.
    15. Ian Martin, 2011. "Simple Variance Swaps," NBER Working Papers 16884, National Bureau of Economic Research, Inc.
    16. Ruslan Bikbov & Mikhail Chernov, 2009. "Unspanned Stochastic Volatility in Affine Models: Evidence from Eurodollar Futures and Options," Management Science, INFORMS, vol. 55(8), pages 1292-1305, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sylvia Sarantopoulou-Chiourea & George Skiadopoulos, 2015. "A New Predictor of Real Economic Activity: The S&P 500 Option Implied Risk Aversion," Working Papers 741, Queen Mary University of London, School of Economics and Finance.
    2. Philippe Mueller & Andreas Stathopoulos & Andrea Vedolin, "undated". "International Correlation Risk," FMG Discussion Papers dp716, Financial Markets Group.
    3. repec:bla:jfinan:v:72:y:2017:i:3:p:1213-1252 is not listed on IDEAS
    4. Konstantinidi, Eirini & Skiadopoulos, George, 2016. "How does the market variance risk premium vary over time? Evidence from S&P 500 variance swap investment returns," Journal of Banking & Finance, Elsevier, vol. 62(C), pages 62-75.
    5. Philippe Mueller & Alireza Tahbaz-Salehi & Andrea Vedolin, 2017. "Exchange Rates and Monetary Policy Uncertainty," Journal of Finance, American Finance Association, vol. 72(3), pages 1213-1252, June.
    6. Petar Sabtchevsky & Paul Whelan & Andrea Vedolin & Philippe Mueller, 2017. "Variance Risk Premia on Stocks and Bonds," 2017 Meeting Papers 1161, Society for Economic Dynamics.
    7. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2016. "Mortgage Risk and the Yield Curve," Review of Financial Studies, Society for Financial Studies, vol. 29(5), pages 1220-1253.
    8. Bekaert, Geert & Hoerova, Marie, 2016. "What do asset prices have to say about risk appetite and uncertainty?," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 103-118.
    9. Prokopczuk, Marcel & Wese Simen, Chardin, 2014. "The importance of the volatility risk premium for volatility forecasting," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 303-320.
    10. Carr, Peter & Wu, Liuren, 2016. "Analyzing volatility risk and risk premium in option contracts: A new theory," Journal of Financial Economics, Elsevier, vol. 120(1), pages 1-20.
    11. Dong Lou & Hongjun Yan & Jinfan Zhang, 2013. "Anticipated and Repeated Shocks in Liquid Markets," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1891-1912.
    12. Aytek Malkhozov & Philippe Mueller & Andrea Vedolin & Gyuri Venter, 2013. "Mortgage Hedging in Fixed Income Markets," FMG Discussion Papers dp722, Financial Markets Group.
    13. Andries, Marianne & Eisenbach, Thomas M. & Schmalz, Martin C. & Wang, Yichuan, 2015. "The term structure of the price of variance risk," Staff Reports 736, Federal Reserve Bank of New York.
    14. Zhu, Xiaoneng, 2015. "Out-of-sample bond risk premium predictions: A global common factor," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 155-173.
    15. Bo Young Chang & Bruno Feunou, 2013. "Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility," Staff Working Papers 13-37, Bank of Canada.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    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:fmg:fmgdps:dp699. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (The FMG Administration). General contact details of provider: http://www.lse.ac.uk/fmg/ .

    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.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.