Nominal Bonds, Real Bonds, and Equity

56 Pages Posted: 24 Dec 2011 Last revised: 6 Mar 2012

Andrew Ang

BlackRock, Inc

Maxim Ulrich

Columbia Business School - Finance and Economics

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: term structure, 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). Netspar Discussion Paper No. 12/2011-103. Available at SSRN: or

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

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

Maxim Ulrich

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States


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