Fiscal policy driven bond risk premia

Lorenzo Bretscher, Alex Hsu, Andrea Tamoni

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)53-73
Number of pages21
JournalJournal of Financial Economics
Volume138
Issue number1
DOIs
StatePublished - Oct 2020

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Keywords

  • Bond risk premia
  • Fiscal policy
  • Term structure
  • Uncertainty

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