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Bond variance risk premiums

Choi, Hoyong, Mueller, Philippe and Vedolin, Andrea (2016) Bond variance risk premiums. . Social Science Research Network (SSRN).

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Abstract

Using data from 1983 to 2010, we propose a new fear measure for Treasury markets, akin to the VIX for equities, labeled TIV. We show that TIV explains one third of the time variation in funding liquidity and that the spread between the VIX and TIV captures flight to quality. We then construct Treasury bond variance risk premia as the difference between the implied variance and an expected variance estimate using autoregressive models. Bond variance risk premia display pronounced spikes during crisis periods. We show that variance risk premia encompass a broad spectrum of macroeconomic uncertainty. Uncertainty about the nominal and the real side of the economy increase variance risk premia but uncertainty about monetary policy has a strongly negative effect. We document that bond variance risk premia predict excess returns on Treasuries, stocks, corporate bonds and mortgage-backed securities, both in-sample and out-of-sample. Furthermore, this predictability is not subsumed by other standard predictors.

Item Type: Monograph (Working Paper)
Additional Information: © 2011 The Authors
Divisions: Finance
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
JEL classification: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E47 - Forecasting and Simulation
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited: 16 Apr 2012 10:23
Last Modified: 13 Sep 2024 20:19
URI: http://eprints.lse.ac.uk/id/eprint/43090

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