Bond Risk Premiums at the Zero Lower Bound

43 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 2019

See all articles by Martin Andreasen

Martin Andreasen

University of Calgary

Kasper Jørgensen

Federal Reserve Board

Andrew Meldrum

Board of Governors of the Federal Reserve System

Date Written: 2019-05-28

Abstract

This paper documents a significantly stronger relationship between the slope of the yield curve and future excess bond returns on Treasuries from 2008-2015 than before 2008. This new predictability result is not matched by the standard shadow rate model with Gaussian factor dynamics, but extending the model with regime-switching in the (physical) dynamics of the factors at the lower bound resolves this shortcoming. The model is also consistent with the downwards trend in surveys on short rate expectations at long horizons, but requires a break in the level of its factors to closely fit the low level of these surveys since 2015.

Keywords: Dynamic Term Structure Model, Bond Return Predictability, Regime-Switching, Shadow Rate Model, Structural Break

JEL Classification: G12, E43, E44

Suggested Citation

Andreasen, Martin and Jørgensen, Kasper and Meldrum, Andrew, Bond Risk Premiums at the Zero Lower Bound (2019-05-28). FEDS Working Paper No. 2019-040. Available at SSRN: https://ssrn.com/abstract=3423246 or http://dx.doi.org/10.17016/FEDS.2019.040

Martin Andreasen (Contact Author)

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

Kasper Jørgensen

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andrew Meldrum

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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