Financial Conditions, Macroeconomic Factors and (Un)Expected Bond Excess Returns

34 Pages Posted: 21 Jun 2016

See all articles by Christoph Fricke

Christoph Fricke

Deutsche Bundesbank

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Date Written: 2014

Abstract

Bond excess returns can be predicted by macro factors, however, large parts remain still unexplained. We apply a novel term structure model to decompose bond excess returns into expected excess returns (risk premia) and the unexpected part. In order to explore these risk premia and innovations, we complement macro variables by financial condition variables as possible determinants of bond excess returns. We find that the expected part of bond excess returns is driven by macro factors, whereas innovations seem to be mainly influenced by financial conditions, before and after the financial crisis. Thus financial conditions, such as financial stress, deserve attention when analyzing bond excess returns.

Keywords: financial conditions, bond excess returns, term premia

JEL Classification: E43, G12

Suggested Citation

Fricke, Christoph and Menkhoff, Lukas, Financial Conditions, Macroeconomic Factors and (Un)Expected Bond Excess Returns (2014). Bundesbank Discussion Paper No. 35/2014. Available at SSRN: https://ssrn.com/abstract=2797008

Christoph Fricke (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

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