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Monetary Policy Uncertainty and Bond Risk Premium

41 Pages Posted: 29 Aug 2016 Last revised: 17 Jan 2017

Fuwei Jiang

Central University of Finance and Economics (CUFE) - School of Finance

Guoshi Tong

Renmin University

Date Written: October 1, 2016

Abstract

We show that uncertainty of monetary policy (MPU) commands a risk premium in the US Treasury bond market. Using the news based MPU measure in Baker, Bloom, and Davis (2016) to capture monetary policy uncertainty, we find that MPU forecasts significantly and positively future monthly Treasury bond excess returns. This forecastability remains significant controlling for standard bond risk premium predictors based on yield curve and macroeconomic fundamentals. The predictive power of MPU is not driven by uncertainty of economic growth, inflation and general economic condition, and is confirmed in out-of-sample tests.

Keywords: Bond Return Predictability, Monetary Policy Uncertainty, Out-of-sample Forecasting

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Jiang, Fuwei and Tong, Guoshi, Monetary Policy Uncertainty and Bond Risk Premium (October 1, 2016). Available at SSRN: https://ssrn.com/abstract=2831092 or http://dx.doi.org/10.2139/ssrn.2831092

Fuwei Jiang (Contact Author)

Central University of Finance and Economics (CUFE) - School of Finance ( email )

39 South College Road
Haidian District
Beijing, 100081
China

Guoshi Tong

Renmin University ( email )

59 Zhongguancun Street
Beijing, 100872
China

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