Abstract

http://ssrn.com/abstract=1092855
 
 

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Bond Supply and Excess Bond Returns


Robin M. Greenwood


Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Dimitri Vayanos


London School of Economics; Center for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

February 2008

NBER Working Paper No. w13806

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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Date posted: February 13, 2008  

Suggested Citation

Greenwood, Robin M. and Vayanos, Dimitri, Bond Supply and Excess Bond Returns (February 2008). NBER Working Paper No. w13806. Available at SSRN: http://ssrn.com/abstract=1092855

Contact Information

Robin M. Greenwood
Harvard Business School - Finance Unit ( email )
Boston, MA 02163
United States
617-495-6979 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Dimitri Vayanos (Contact Author)
London School of Economics ( email )
A350
Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)20 7955 6382 (Phone)
+44 (0)20 7955 7420 (Fax)
Center for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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