Bond Risk Premiums at the Zero Lower Bound
Copyright policy )Bond Risk Premiums at the Zero Lower Bound
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.
- University of Calgary Canada
- Aarhus University Denmark
- Federal Reserve System United States
- Federal Reserve United States
- European Central Bank Germany
bond return predictability, Dynamic term structure model, bond return predictability, shadow rate model, structural break, regime-switching, Dynamic term structure models, unspanned stochastic volatility, Statistics, Game theory, economics, finance, and other social and behavioral sciences, Unspanned stochastic volatility, Bond return predictability, dynamic term structure models
bond return predictability, Dynamic term structure model, bond return predictability, shadow rate model, structural break, regime-switching, Dynamic term structure models, unspanned stochastic volatility, Statistics, Game theory, economics, finance, and other social and behavioral sciences, Unspanned stochastic volatility, Bond return predictability, dynamic term structure models
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