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Disaster risk matters in the bond market

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  • Su, Hao
  • Ying, Chengwei
  • Zhu, Xiaoneng

Abstract

We propose a rare disaster risk indicator and study its predictive power on the returns of U.S. Treasury bonds. The rare disaster risk factor is extracted from rare disaster concern proxies using partial least square method. Empirical results indicate that disaster risk significantly predicts time-varying bond risk premium. The predictive power is significant both in- and out-of-sample. Furthermore, the spanning test results suggest that information content of disaster risk indicator is not spanned by the current yield curve.

Suggested Citation

  • Su, Hao & Ying, Chengwei & Zhu, Xiaoneng, 2022. "Disaster risk matters in the bond market," Finance Research Letters, Elsevier, vol. 47(PA).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612322000800
    DOI: 10.1016/j.frl.2022.102764
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    More about this item

    Keywords

    Rare disaster risk; Return predictability; Yield curve; Bond risk premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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