Equity Trading Activity and Treasury Bond Risk Premia

78 Pages Posted: 18 Oct 2019 Last revised: 6 Dec 2020

See all articles by Stefanie Schraeder

Stefanie Schraeder

Department of Finance, University of Vienna

Elvira Sojli

UNSW Australia Business School, School of Banking and Finance

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; Institute of Global Finance, UNSW Business School; Financial Research Network (FIRN)

Wing Wah Tham

University of New South Wales (UNSW)

Date Written: October 4, 2019

Abstract

We link equity and treasury bond markets via a monetary sector. When macroeconomic state shifts are likely, there is more information asymmetry, so the volatility-volume ratio (VVR) is high in equities. Central banks react to state shifts, but their actions are uncertain. Therefore, when such shifts are more likely, bonds command larger risk premia. Empirically, we find that VVR and monetary uncertainty measures reliably predict one-year-ahead excess bond returns, both in- and out-of-sample. Low equity volume predicts high VIX, increased dividend volatility, and higher co-movement in stock and bond returns, all of which accord with our model.

Keywords: Equity market volume; Volatility; Bond risk premia; Difference of opinion; Monetary policy uncertainty

JEL Classification: G10, G12, G14, G20

Suggested Citation

Schraeder, Stefanie and Sojli, Elvira and Subrahmanyam, Avanidhar and Tham, Wing Wah, Equity Trading Activity and Treasury Bond Risk Premia (October 4, 2019). Available at SSRN: https://ssrn.com/abstract=3464060 or http://dx.doi.org/10.2139/ssrn.3464060

Stefanie Schraeder

Department of Finance, University of Vienna ( email )

Vienna
Austria
+4367760776378 (Phone)

Elvira Sojli

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Avanidhar Subrahmanyam (Contact Author)

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-5355 (Phone)
310-206-5455 (Fax)

Institute of Global Finance, UNSW Business School

Sydney, NSW 2052
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Wing Wah Tham

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

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