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 OPEN ACCESS


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.

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Item Type: Article
Subject Areas: Finance
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© 2020 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 licence

Date Deposited: 16 Jun 2020 09:05
Date of first compliant deposit: 16 Jun 2020
Subjects: Financial markets
Financial risk
Government economic controls and regulations
Last Modified: 14 May 2024 00:42

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