Understanding Term Premia on Real Bonds

50 Pages Posted: 15 Mar 2012 Last revised: 19 May 2012

See all articles by Jing-Zhi Huang

Jing-Zhi Huang

Pennsylvania State University - University Park - Department of Finance

Zhan Shi

Tsinghua University - PBC School of Finance

Date Written: March 8, 2012

Abstract

Real bonds are a very important asset class and deciphering their risk-return relationship deepens our already extensive understanding about term premia. However, there has been little research on the dynamic behavior and economic determinants of risk premia on such bonds. This paper takes a series of steps towards extending extant evidence on nominal bond premia to their real counterparts. First, we document empirically that the real bond risk premium changes over time and fluctuates between positive and negative values. Second, we find that the real term structure itself contains a component that, albeit undetectable from cross section of bond yields, drives risk premia. Finally, we examine the potential link between the real bond premia and macroeconomic variables. We find that macro factors associated with real estate and consumer income and expenditure can capture a large portion of forecastable variations in excess returns on real bonds. Our empirical results indicate an essential need to propose asset pricing models such that implied real yields are able to account for these stylized facts.

Keywords: Term premium, Real interest rates, Treasury Ination-Protected Securities (TIPS)

JEL Classification: E31, E43, G12

Suggested Citation

Huang, Jing-Zhi Jay and Shi, Zhan, Understanding Term Premia on Real Bonds (March 8, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2022771 or http://dx.doi.org/10.2139/ssrn.2022771

Jing-Zhi Jay Huang (Contact Author)

Pennsylvania State University - University Park - Department of Finance ( email )

University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jxh56

Zhan Shi

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

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