Disaster Risks in Bond Returns

64 Pages Posted: 18 Nov 2019

See all articles by Hai Lin

Hai Lin

Victoria University of Wellington - School of Economics & Finance

Liya Liu

Shanghai University of Finance and Economics

Hao Su

Shanghai University of Economics and Finance

Xiaoneng Zhu

Shanghai University of Finance and Economics

Date Written: October 31, 2019

Abstract

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

Lin, Hai and Liu, Liya and Su, Hao and Zhu, Xiaoneng, Disaster Risks in Bond Returns (October 31, 2019). Available at SSRN: https://ssrn.com/abstract=3478838 or http://dx.doi.org/10.2139/ssrn.3478838

Hai Lin (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand

Liya Liu

Shanghai University of Finance and Economics

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Hao Su

Shanghai University of Economics and Finance ( email )

Xiaoneng Zhu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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