Trend and Cycle in Bond Premia

By Monika Piazzesi, Martin Schneider. 2009

120 citations recorded by the source corpus.

Common statistical measures of bond risk premia are volatile and countercyclical. This paper uses survey data on interest rate forecasts to construct subjective bond risk premia. Subjective premia are less volatile and not very cyclical; instead they are high only around the early 1980s. The reason for the discrepancy is that survey forecasts of interest rates are made as if both the level and the slope of the yield curve are more persistent than under common statistical models. The paper then proposes a consumption based asset pricing model with learning to explain jointly the difference between survey and statistical forecasts, and the evolution of subjective premia. Adaptive learning gives rise to inertia in forecasts, as well as changes in conditional volatility that help understand both features.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/985badc38dcb6dbd7c9fe37f8a6868f843265fc5

Citations in the corpus

• Forecasting Interest Rates with Shifting Endpoints (2012, unknown): “Survey forecasts are used in term structure models by, among others, Piazzesi and Schneider (2011), Chun (2011), Ehling et al. (2012) and Kim and Orphanides (2012).”
• Out-of-Sample Predictions of Bond Excess Returns and Forward Rates: An Asset Allocation Perspective (2010, unknown): “More speci cally, several studies recorded that bond excess returns vary over time and they are a quantitatively important source of uctuations in the bond market (see, inter alia, Ludvigson and Ng, 2009; Piazzesi and Schneider, 2011).”
• Monetary Policy, Financial Conditions, and Financial Stability (2014, unknown): “For Treasury securities, looser monetary policy, combined with investor behavior, can lead to lower real term premiums for Treasury securities than can be justified by fundamentals.”
• Expectations and Investment (2015, unknown): “Piazzesi, Salomao, and Schneider (2013) also find that bond market investors tend to perceive interest rate trends to be more persistent than they are.”
• Natural Expectations, Macroeconomic Dynamics, and Asset Pricing (2012, unknown): “Some research on bubbles has moved in this direction (e.g., Case and Shiller 2003; VissingJorgensen 2003; Shiller 2005; Piazzesi and Schneider 2009, 2011) and we hope that more will do so in the future.”
• Learning from Inflation Experiences (2016, unknown): “, Sargent (1999), Orphanides and Williams (2005a), Milani (2007)).”
• Uncertainty Shocks, Asset Supply and Pricing over the Business Cycle (2018, unknown): “As a concrete data counterpart, we rely on a state space model of interest rate and inflation dynamics estimated by Piazzesi et al. (2013).30 The resulting series has a volatility of 2%, an autocorrelation coefficient of 0.8 and its correlation with investment is 0.1.”
• Expected Returns in Treasury Bonds (2015, unknown): “To study the small sample distribution of the R̄2’s, we perform a nonparametric stationary bootstrap with a random block length following Politis and Romano (1994) and Li and Maddala (1997).”