Fear in the "Fearless" Treasury Market
81 Pages Posted: 14 Oct 2024
Date Written: September 08, 2024
Abstract
This paper examines how fear affects the Treasury market and predicts Treasury bond returns. Using a text-based fear index from social and news media, we find that fear significantly predicts future Treasury returns, both in-sample and out-of-sample, and suggests the global transmission of fear. We also propose a model explaining that risk aversion shocks drive bond risk premia. Our paper further explores various dimensions of fear effects, such as term, magnitude, dynamics, and sources, and compares them with other sentiments. The results highlight the critical role of fear in Treasury market dynamics.
Keywords: Bond risk premia, Text-based sentiment, Return predictability
JEL Classification: C53, G11, G12, G17
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