Equity Trading Activity and Treasury Bond Risk Premia
70 Pages Posted: 18 Oct 2019 Last revised: 6 Dec 2020
Date Written: October 4, 2019
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: Suggested Citation