The Equity Volatility-Volume Ratio and Treasury Bond Returns
59 Pages Posted: 18 Oct 2019 Last revised: 24 Oct 2019
Date Written: October 4, 2019
We consider stock and bond market prices jointly in a setting where rational investors are unsure if overconfident investors have valid signals. In times of likely shifts in economic states, the probability of receiving informative signals is higher, so trading volume (volatility) is lower (higher). Central banks react only to macroeconomic changes, but their reaction is uncertain. So during periods where macroeconomic state shifts are more likely, long-term bonds command larger risk premia. We confirm these predictions by showing that the equity market volatility-volume ratio significantly predicts monetary policy uncertainty as well as one-year ahead bond returns.
Keywords: Stock market volume-to-volatility ratio, Amihud ratio, Bond risk premia, Overconfident investors, Monetary policy uncertainty
JEL Classification: G10, G14, G12, G20
Suggested Citation: Suggested Citation