Economic-state Variation in Uncertainty-Yield Dynamics

The Review of Asset Pricing Studies, Volume 11, March 2021, pp. 60-104.

Posted: 13 Aug 2018 Last revised: 12 Jun 2021

See all articles by Robert A. Connolly

Robert A. Connolly

University of Florida

David A. Dubofsky

University of Louisville - Department of Finance

Chris T. Stivers

University of Louisville

Date Written: December 1, 2020

Abstract

We show there is a much stronger negative, dynamic relation between changes in economic uncertainty and Treasury yields over weaker economic times since at least 1990. We document this economic-state variation in uncertainty-yield dynamics for weekly and monthly change horizons, for nominal yields and real-yield proxies, for multiple economic-state identification methods, and for different economic uncertainty metrics. We present additional findings that suggest short-term fluctuations in precautionary-savings and consumption-smoothing forces are more impactful on interest rate dynamics during weaker economic times, especially relying on surveys of expected economic growth and inflation.

Keywords: Treasury yields, economic uncertainty, precautionary savings, consumption smoothing, risk aversion

JEL Classification: G11, G12

Suggested Citation

Connolly, Robert A. and Dubofsky, David A. and Stivers, Chris T., Economic-state Variation in Uncertainty-Yield Dynamics (December 1, 2020). The Review of Asset Pricing Studies, Volume 11, March 2021, pp. 60-104., Available at SSRN: https://ssrn.com/abstract=3222241 or http://dx.doi.org/10.2139/ssrn.3222241

Robert A. Connolly

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

David A. Dubofsky

University of Louisville - Department of Finance ( email )

PO BOX 844000
Louisville, KY 40292
United States
502-852-3016 (Phone)
502-852-6072 (Fax)

HOME PAGE: http://cobweb2.louisville.edu/profile/Dubofsky.html

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

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