Nominal Bonds, Real Bonds, and Equity

56 Pages Posted: 2 Nov 2011 Last revised: 17 Apr 2012

Andrew Ang

BlackRock, Inc

Maxim Ulrich

Karlsruhe Institute of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2012


We decompose the term structure of expected equity returns into (1) the real short rate, (2) a premium for holding real long-term bonds, or the real duration premium, the excess returns of nominal long-term bonds over real bonds which reflects (3) expected inflation and (4) inflation risk, and (5) a real cashflow risk premium, which is the excess return of equity over nominal bonds. The shape of the nominal and real bond yield curves are upward sloping due to increasing duration and inflation risk premiums. The term structures of expected equity returns and equity risk premiums, in contrast, are downward sloping due to the decreasing effect of short-term expected inflation, or trend inflation, across horizons. Around 70% of the variation of expected equity returns at the 10-year horizon is due to variation in the output gap and trend inflation.

Keywords: Yield Curve, Equity Risk Premium, Fed Model, TIPS, Taylor Rule

JEL Classification: G12, E31, E42, E52

Suggested Citation

Ang, Andrew and Ulrich, Maxim, Nominal Bonds, Real Bonds, and Equity (March 5, 2012). Available at SSRN: or

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Maxim Ulrich (Contact Author)

Karlsruhe Institute of Technology ( email )

Bluecherstrasse 17
Karlsruhe, Baden Württemberg 76131
+4972160844270 (Phone)


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