Short-Run Bond Risk Premia

47 Pages Posted: 27 May 2011 Last revised: 7 Aug 2012

See all articles by Philippe Mueller

Philippe Mueller

Warwick Business School Finance Group

Andrea Vedolin

Boston University - Department of Finance & Economics

Hao Zhou

Tsinghua University - PBC School of Finance; SUSTech Business School

Date Written: May 24, 2011

Abstract

In the short-run, bond risk premia exhibit pronounced spikes around major economic and financial crises. In contrast, long-term bond risk premia feature cyclical swings. We empirically examine the predictability of the market variance risk premium – a proxy of economic uncertainty – for bond risk premia and we show the strong predictive power for the one month horizon that almost entirely disappears for horizons above one year. The variance risk premium is largely orthogonal to well-established bond return predictors – forward rates, jumps, yield curve factors, and macro variables. We rationalize our empirical findings in an equilibrium model of uncertainty about consumption and inflation which is coupled with recursive preferences. We show that the model can quantitatively explain the levels of bond and variance risk premia as well as the predictive power of the variance risk premium while jointly matching salient features of other asset prices.

Suggested Citation

Mueller, Philippe and Vedolin, Andrea and Zhou, Hao, Short-Run Bond Risk Premia (May 24, 2011). AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1851854 or http://dx.doi.org/10.2139/ssrn.1851854

Philippe Mueller

Warwick Business School Finance Group ( email )

Gibbet Hill Rd
Coventry, CV4 7AL
Great Britain

Andrea Vedolin

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)

SUSTech Business School ( email )

1088 Xueyuan Avenue, Nanshan District
Southern University of Science and Technology
Shenzhen, Guangdong 518055
China

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