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Inflation bets or deflation hedges : the changing risks of nominal bonds

Author: John Y Campbell; Adi Sunderam; Luis M Viceira; National Bureau of Economic Research.
Publisher: Cambridge, Mass. : National Bureau of Economic Research, ©2009.
Series: Working paper series (National Bureau of Economic Research), no. 14701.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953-2005, it was particularly high in the early 1980's and negative in the early 2000's. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion,  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: John Y Campbell; Adi Sunderam; Luis M Viceira; National Bureau of Economic Research.
OCLC Number: 301945178
Notes: "February 2009."
Description: 1 online resource (40, [7], 25 p.) : ill., digital.
Series Title: Working paper series (National Bureau of Economic Research), no. 14701.
Responsibility: John Y. Campbell, Adi Sunderam, Luis M. Viceira.

Abstract:

The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953-2005, it was particularly high in the early 1980's and negative in the early 2000's. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion, temporary and permanent components of expected inflation, and the covariance between nominal variables and the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. Log nominal bond yields and term premia are quadratic in these state variables, with term premia determined mainly by the product of risk aversion and the nominal-real covariance. The concavity of the yield curve -- the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields -- is a good proxy for the level of term premia. The nominal-real covariance has declined since the early 1980's, driving down term premia.

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