CREATES Research Paper 2016-26
60 Pages Posted: 7 Sep 2016 Last revised: 19 May 2017
Date Written: May 16, 2017
This paper provides new evidence on bond risk premia by conditioning the classic Campbell-Shiller regressions on the business cycle. In expansions, we find mostly positive intercepts and negative slopes, but the results are completely reversed in recessions with negative intercepts and positive slopes. The pattern in these coefficients is explained by a term structure model with business cycle dependent loadings in the market price of risk. We argue that such a re-pricing of risk may be induced by a switch in monetary policy, as a standard Taylor-rule displays significantly less interest rate smoothing in recessions compared to expansions.
An Online Appendix is available at http://ssrn.com/abstract=2857802.
Keywords: Bond return predictability, Business cycle variation in excess returns, Market price of risk, Zero-lower bound, Unspanned macroeconomic risk
JEL Classification: E43, E44, G12
Suggested Citation: Suggested Citation
Andreasen, Martin M. and Engsted, Tom and Møller, Stig Vinther and Sander, Magnus, Bond Market Asymmetries Across Recessions and Expansions: New Evidence on Risk Premia (May 16, 2017). CREATES Research Paper 2016-26. Available at SSRN: https://ssrn.com/abstract=2834898