Bond supply and excess bond returns

Greenwood, Robin and Vayanos, Dimitri ORCID: 0000-0002-0944-4914 (2014) Bond supply and excess bond returns. Review of Financial Studies, 27 (3). 663 - 713. ISSN 0893-9454

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Abstract

We examine empirically how the supply and maturity structure of government debt affect bond yields and expected returns. We organize our investigation around a term-structure model in which risk-averse arbitrageurs absorb shocks to the demand and supply for bonds of different maturities. These shocks affect the term structure because they alter the price of duration risk. Consistent with the model, we find that the maturity-weighted-debt-to-GDP ratio is positively related to bond yields and future returns, controlling for the short rate. Moreover, these effects are stronger for longer-maturity bonds and following periods when arbitrageurs have lost money.

Item Type:	Article
Official URL:	http://rfs.oxfordjournals.org/
Additional Information:	© 2014 The Authors. Published by Oxford University Press on behalf of The Society for Financial Studies.
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 > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt; Debt Management
Date Deposited:	25 Apr 2014 09:03
Last Modified:	12 Dec 2024 00:37
URI:	http://eprints.lse.ac.uk/id/eprint/56564

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