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http://ssrn.com/abstract=1851854
 
 

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Short-Run Bond Risk Premia


Philippe Mueller


London School of Economics & Political Science (LSE) - Department of Finance

Andrea Vedolin


London School of Economics and Political Science

Hao Zhou


PBC School of Finance, Tsinghua University

May 24, 2011

AFA 2013 San Diego Meetings Paper

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.

Number of Pages in PDF File: 47

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Date posted: May 27, 2011 ; Last revised: August 7, 2012

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: http://ssrn.com/abstract=1851854 or http://dx.doi.org/10.2139/ssrn.1851854

Contact Information

Philippe Mueller
London School of Economics & Political Science (LSE) - Department of Finance ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
Andrea Vedolin
London School of Economics and Political Science ( email )
Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
Hao Zhou (Contact Author)
PBC School of Finance, Tsinghua University ( email )
43 Chengfu Road, Haidian District
Beijing, 100083
China
+86-10-62790655 (Phone)
HOME PAGE: http://www.pbcsf.tsinghua.edu.cn
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