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Bond risk premiums at the zero lower bound

Author

Listed:
  • Andreasen, Martin M.
  • Jørgensen, Kasper
  • Meldrum, Andrew

Abstract

We document that the spread between long- and short-term government bond yields is a stronger predictor of excess bond returns when the U.S. economy is at the zero lower bound (ZLB) than away from this bound. The Gaussian shadow rate model with a linear or quadratic shadow rate is unable to explain this change in return predictability. The same holds for the quadratic term structure model and the autoregressive gamma-zero model that also enforce the ZLB. In contrast, the linear-rational square-root model explains our new empirical finding because the model allows for unspanned stochastic volatility as seen in bond yields.

Suggested Citation

  • Andreasen, Martin M. & Jørgensen, Kasper & Meldrum, Andrew, 2025. "Bond risk premiums at the zero lower bound," Journal of Econometrics, Elsevier, vol. 247(C).
    • Handle: RePEc:eee:econom:v:247:y:2025:i:c:s0304407624002902
    DOI: 10.1016/j.jeconom.2024.105939
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    More about this item

    Keywords

    Bond return predictability; Dynamic term structure models; Unspanned stochastic volatility;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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