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Bond Market Asymmetries Across Recessions and Expansions: New Evidence on Risk Premia

CREATES Research Paper 2016-26

62 Pages Posted: 7 Sep 2016 Last revised: 18 Sep 2017

Martin M. Andreasen

University of Aarhus; CREATES, Aarhus University

Tom Engsted

University of Aarhus - CREATES

Stig Vinther Møller

University of Aarhus - CREATES

Magnus Sander

University of Aarhus - CREATES

Date Written: September 6, 2017

Abstract

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

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 (September 6, 2017). CREATES Research Paper 2016-26. Available at SSRN: https://ssrn.com/abstract=2834898

Martin M. Andreasen

University of Aarhus ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

Tom Engsted

University of Aarhus - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Stig Vinther Møller (Contact Author)

University of Aarhus - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Magnus Sander

University of Aarhus - CREATES ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

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