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Bond Supply and Excess Bond Returns

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Listed author(s):
  • Robin Greenwood
  • Dimitri Vayanos

Abstract

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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File URL: http://www.nber.org/papers/w13806.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13806.

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Date of creation: Feb 2008
Publication status: published as Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
Handle: RePEc:nbr:nberwo:13806
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Find related papers by JEL classification:
  • G1 - Financial Economics - - General Financial Markets
  • H6 - Public Economics - - National Budget, Deficit, and Debt

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The Federal Reserve's Maturity Extension Program and Treasury debt management
    by James Hamilton in Econbrowser on 2012-08-08 11:55:53
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