Equity Trading Activity and Treasury Bond Risk Premia

Forthcoming Journal of Financial and Quantitative Analysis

70 Pages Posted: 18 Oct 2019 Last revised: 12 Aug 2021

See all articles by Stefanie Schraeder

Stefanie Schraeder

Department of Finance, University of Vienna

Elvira Sojli

University of New South Wales (UNSW); UNSW Business School

Avanidhar Subrahmanyam

University of California, Los Angeles (UCLA) - Finance Area; 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 an informational channel. When macroeconomic state shifts are more probable, informed traders are more likely to have valid signals about fundamentals, so that uninformed traders are less willing to trade against informed ones. This implies low volume and high volatility, i.e., a high volatility-volume ratio (\emph{VVR}). Central banks react to state shifts, but their actions are uncertain. Therefore, a higher state shift likelihood implies larger bond risk premia. These arguments together imply that \emph{VVR} should positively predict bond excess returns. We empirically test and confirm this prediction, both in- and out-of-sample.

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). Forthcoming Journal of Financial and Quantitative Analysis, 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

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://https://sites.google.com/site/esojli/

UNSW Business School ( email )

Sydney, NSW 2052
Australia

HOME PAGE: http://sites.google.com/site/esojli/

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)

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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