Appendix: Monetary Policy Drivers of Bond and Equity Risks

By John Y. Campbell, Carolin E. Pflueger, Luis M. Viceira. 2020

191 citations recorded by the source corpus.

How do monetary policy rules, monetary policy uncertainty, and macroeconomic shocks affect the risk properties of US Treasury bonds? The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average over the period 1960-2011, it was unusually high in the 1980s, and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper develops a New Keynesian macroeconomic model with habit formation preferences that prices both bonds and stocks. The model attributes the increase in bond risks in the 1980s to a shift towards strongly anti-inflationary monetary policy, while the decrease in bond risks after 2000 is attributed to a renewed focus on output fluctuations, and a shift from transitory to persistent monetary policy shocks. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f8f424342203505a36dad7185878f077e883d7b5

Citations in the corpus

• Treasury inconvenience yields during the COVID-19 crisis (2020, unknown): “More generally, Treasury bonds have had negative beta in recent decades, rising in price when stock prices fall ( Baele et al., 2019; Campbell et al., 2019; He et al., 2019b; Cieslak and Vissing-Jorgensen, 2020 ).”
• Bond Market Exposures to Macroeconomic and Monetary Policy Risks (2017, unknown): “The works that come closest to my paper are Burkhardt and Hasseltoft (2012), Campbell, Pflueger, and Viceira (2013) and David and Veronesi (2013).”