Fiscal policy driven bond risk premia

Bretscher, L, Hsu, A and Tamoni, A (2020) Fiscal policy driven bond risk premia. Journal of Financial Economics, 138 (1). pp. 53-73. ISSN 0304-405X

Abstract

Fiscal policy matters for bond risk premia. Empirically, government spending level and uncertainty predict bond excess returns, as well as term structure level and slope movements. Shocks to government spending level and uncertainty are also priced in the cross-section of bond and stock portfolios. Theoretically, government spending level shocks raise inflation when marginal utility is high, thus generating positive inflation risk premia (term structure level effect). Uncertainty shocks steepen the yield curve (slope effect), producing positive term premia. These effects are consistent with evidence from a structural vector autoregression. Asset pricing tests using model simulated data corroborate our empirical findings.

More Details

Item Type: Article
Subject Areas: Finance
Additional Information:

© 2020 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 licence https://creativecommons.org/licenses/by-nc-nd/4.0

Date Deposited: 16 Jun 2020 09:05
Date of first compliant deposit: 16 Jun 2020
Subjects: F > Financial markets
F > Financial risk
B > Bonds
G > Government economic controls and regulations
Last Modified: 13 Aug 2021 00:21
URI: https://lbsresearch.london.edu/id/eprint/1425
More

Export and Share


Download

Accepted Version - Text
  • Restricted to Registered users only
  • Available under License

Statistics

Altmetrics
View details on Dimensions' website

Downloads from LBS Research Online

View details

Actions (login required)

Edit Item Edit Item