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Yield Curve Premia

67 Pages Posted: 22 Apr 2017 Last revised: 7 Jul 2017

Jordan Brooks

AQR Capital Management, LLC

Tobias J. Moskowitz

Yale University, Yale SOM; AQR Capital; National Bureau of Economic Research (NBER)

Date Written: July 1, 2017

Abstract

We examine return premia associated with the level, slope, and curvature of the yield curve over time and across countries from a novel perspective by borrowing pricing factors from other asset classes. Measures of value, momentum, and carry, when applied to bonds, provide a rich description of bond return premia: subsuming pricing information from the yield curve’s first three principal components, as well as priced factors unspanned by yield information, such as macroeconomic growth, inflation, and the Cochrane and Piazzesi (2005) factor. These characteristics provide new economic intuition for what drives bond return premia, where value, measured by a bond’s yield relative to a fundamental anchor of expected inflation, subsumes a “level” factor. Momentum, which reveals recent yield trends, and carry, which captures expected future yields if the yield curve does not change, subsume information about expected returns from the slope and curvature of the yield curve. These characteristics describe both the cross-section and time-series of yield curve premia and connect to return predictability in other asset classes, suggesting a unifying asset pricing framework.

Keywords: fixed income, asset pricing, international financial markets

JEL Classification: G12, G15

Suggested Citation

Brooks, Jordan and Moskowitz, Tobias J., Yield Curve Premia (July 1, 2017). Available at SSRN: https://ssrn.com/abstract=2956411

Jordan Brooks

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Tobias Moskowitz (Contact Author)

Yale University, Yale SOM ( email )

New Haven, CT 06520
United States

HOME PAGE: http://som.yale.edu/tobias-j-moskowitz

AQR Capital ( email )

Greenwich, CT
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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