Disaster Risks in Bond Returns
64 Pages Posted: 18 Nov 2019
Date Written: October 31, 2019
We propose a news-implied rare disaster risk indicator and study its predictive power on the returns of U.S. Treasury bonds. We find that the predictive power of this factor is both statistically significant and economically important and is not spanned by the current yield curve. The disaster risk factor delivers a counter cycle bond risk premium, and the predictability of disaster risk is more significant during periods of economic downturn. Our empirical findings show that disaster risk accounts for a sizable portion of variations in the time-varying bond risk premium.
Keywords: disaster risks; treasury bond; risk premium; predictability
JEL Classification: G11; G12
Suggested Citation: Suggested Citation