Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

Campbell, John Y.; Sunderam, Adi; Viceira, Luis M.

doi:10.3386/w14701

Cited by 228 publications

(218 citation statements)

References 33 publications

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“…The latter increase occurs as consequence of the rising bond risk premium. Taken over the entire recession, long bonds gain in value so that they are recession hedges (Campbell, Sunderam, and Viceira 2008). The same is true in the data, where the gain on long-short bond position is $6.1 by the last month of the recession.…”

Section: Calibrationsupporting

confidence: 60%

“…It follows immediately from the specification of the real SDF that the real term structure of interest rates is flat at y. Nominal bond prices are exponentially affine in 9 For similar approaches see Bekaert, Engstrom, and Grenadier (2005), Bekaert, Engstrom, and Xing (2008), Lettau andWachter (2009), Campbell, Sunderam, andViceira (2008), and David and Veronesi (2009).…”

Section: B1 Bond Pricesmentioning

confidence: 99%

“…Examples are the affine models of Bakshi andChen (1996, 1997) in a square-root diffusion setting and Bakshi and Chen (2005) and Bekaert, Engstrom, and Grenadier (2005), Bekaert, Engstrom, and Xing (2008) in a Gaussian setting, and the linear-quadratic model of Campbell, Sunderam, and Viceira (2008) all of which explore the relationship between aggregate stock and bond markets. Lettau andWachter (2009) andGabaix (2009) additionally study the cross-section of stock returns.…”

Section: Related Literaturementioning

confidence: 99%

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The cross-section and time series of stock and bond returns

Koijen

Lustig

Nieuwerburgh

2017

Journal of Monetary Economics

140

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We propose a three-factor model that jointly prices the cross-section of returns on portfolios of stocks sorted on the book-to-market dimension, the cross-section of government bonds sorted by maturity, and time series variation in expected bond returns. The main insight is that innovations to the nominal bond risk premium price the book-to-market sorted stock portfolios. We argue that these innovations capture business cycle risk and show that dividends of the highest book-to-market portfolio fall substantially more than those of the low book-tomarket portfolio during NBER recessions. We propose a structural model that ties together the nominal bond risk premium, the cross-section of book-to-market sorted stock portfolios, and recessions. This model is quantitatively consistent with the observed value, equity, and nominal bond risk premia.

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Section: Calibrationsupporting

confidence: 60%

Section: B1 Bond Pricesmentioning

confidence: 99%

Section: Related Literaturementioning

confidence: 99%

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The cross-section and time series of stock and bond returns

Koijen

Lustig

Nieuwerburgh

2017

Journal of Monetary Economics

140

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“…The negative correlation is particularly striking for nominal government bonds, because breakeven in ‡ation is positively correlated with stock returns, especially during 2002-03 and 2007-08. Campbell, Sunderam, and Viceira (2009) build a model in which a changing correlation between in ‡ation and stock returns drives changes in the risk properties of nominal Treasury bonds. Their model assumes a constant equity market correlation for TIPS, and thus cannot explain the correlation movements shown for TIPS in Figures 6A and 7A.…”

Section: The History Of In ‡Ation-indexed Bond Marketsmentioning

confidence: 99%

Understanding Inflation-Indexed Bond Markets

2009

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This paper explores the history of in ‡ation-indexed bond markets in the US and the UK. It documents a massive decline in long-term real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the …nancial crisis of 2008. Breakeven in ‡ation rates, calculated from in ‡ation-indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent short-term real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low in ‡ation-indexed yields and high short-term volatility of in ‡ation-indexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for long-term investors. Governments should expect in ‡ation-indexed bonds to be a relatively cheap form of debt …nancing going forward, even though they have o¤ered high returns over the past decade.

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“…Wright ascribes a large amount of the variation in term premia to role of inflation uncertainty. This result seems to make sense, since Piazzesi and Schneider (2006), Campbell, Sunderam, and Viceira (2009), or Rudebusch and Swanson (2008 all argue that inflation uncertainty matters for term premia, a point we pay special attention to in this paper. Söderlind (2009) uses survey information to construct proxies for inflation and output growth uncertainty and finds that uncertainty (as well as liquidity factors) is a significant driver of bond risk premia over the period from 1997 to 2008.…”

Section: Related Literaturementioning

confidence: 97%

Macro-expectations, aggregate uncertainty, and expected term premia

Dick

Schmeling

Schrimpf

2013

European Economic Review

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10064.pdf Non-technical summaryThe empirical term structure literature shows that long-term interest rates are not merely We empirically show that expectations about risk premia are significantly influenced by expectations about real macroeconomic activity (such as GDP), while nominal factors (such as inflation expectations) play a minor role. The uncertainty of forecasters about future business cycle movements also has a pronounced effect on risk premium expectations.Our results indicate that expected risk premia are positively correlated with expectations about GDP and inflation. Higher uncertainty with respect to macroeconomic variables also increases expected risk premia. We also examine how the shape of the yield curve is related to expected risk premia. For instance, the curvature of the yield curve can be explained by information which is also captured by the expected change in risk premia of forecasters in the SPF.Finally, we show that the expected changes in risk premia actually do forecast bond excess returns. This underlines that our proxy for risk premium expectations is indeed informative for developments in bond markets. AbstractBased on individual expectations from the Survey of Professional Forecasters, we construct a real-time proxy for expected term premium changes on long-term bonds. We empirically investigate the relation of these bond term premium expectations with expectations about key macroeconomic variables as well as aggregate macroeconomic uncertainty at the level of individual forecasters. We find that expected term premia are (i) time-varying and reasonably persistent, (ii) strongly related to expectations about future output growth, and (iii) positively affected by uncertainty about future output growth and inflation rates. Expectations about real macroeconomic variables seem to matter more than expectations about nominal factors. Additional findings on term structure factors suggest that the level and slope factor capture information related to uncertainty about real and nominal macroeconomic prospects, and that curvature is related to subjective term premium expectations themselves. Finally, an aggregate measure of forecasters' term premium expectations has predictive power for bond excess returns over horizons of up to one year.JEL-Classification: E43, E44, G12

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Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

Cited by 228 publications

References 33 publications

The cross-section and time series of stock and bond returns

The cross-section and time series of stock and bond returns

Understanding Inflation-Indexed Bond Markets

Macro-expectations, aggregate uncertainty, and expected term premia

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