Regime Shifts and Bond Returns

41 Pages Posted: 7 Nov 2008

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Tom Smith

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Robert Whitelaw

New York University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 1999

Abstract

This paper investigates the implications of a 2-regime model of the business cycle forterm premiums and volatilities in the bond market. The model, which is estimated viamaximum likelihood using GDP, consumption and production data, has two key features-mean growth rates that vary across regimes and time-varying transition probabilities between regimes. The implied dynamics of term premiums and volatilities are complex and interesting. Business cycle turning points are characterized by high volatility and strongly time-varying term premiums. These implications are then investigated using data on bond returns. Nonparametric estimation results are broadly consistent with the model. Using the slope of the term structure as a conditioning variable, we can identify periods with negative term premiums and volatile returns.

Suggested Citation

Boudoukh, Jacob and Richardson, Matthew P. and Smith, Tom M. and Whitelaw, Robert F., Regime Shifts and Bond Returns (November 1999). NYU Working Paper No. FIN-99-010. Available at SSRN: https://ssrn.com/abstract=1296397

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

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AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tom M. Smith

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert F. Whitelaw

New York University ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0338 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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