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Investor sentiment and bond risk premia

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  • Laborda, Ricardo
  • Olmo, Jose

Abstract

This article studies the statistical significance of the set of market sentiment variables proposed by Baker and Wurgler (2006) to predict the risk premium on U.S. sovereign bonds. We show that these variables can be summarized in one single market sentiment factor similar in spirit to the single-return forecasting factor proposed by Cochrane and Piazzesi (2005). Our findings reveal that this factor has predictive power beyond that contained in the yield curve and benchmark macroeconomic factors. The predictive power of this variable is time-varying, exhibiting more relevance during recession periods.

Suggested Citation

  • Laborda, Ricardo & Olmo, Jose, 2014. "Investor sentiment and bond risk premia," Journal of Financial Markets, Elsevier, vol. 18(C), pages 206-233.
    • Handle: RePEc:eee:finmar:v:18:y:2014:i:c:p:206-233
    DOI: 10.1016/j.finmar.2013.05.008
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    References listed on IDEAS

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    2. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
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    4. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    5. Subhankar Nayak, 2010. "Investor Sentiment and Corporate Bond Yield Spreads," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 2(2), pages 59-80, September.
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    7. Dahlquist, Magnus & Hasseltoft, Henrik, 2013. "International Bond Risk Premia," Journal of International Economics, Elsevier, vol. 90(1), pages 17-32.
    8. Malcolm Baker & Jeffrey Wurgler, 2012. "Comovement and Predictability Relationships Between Bonds and the Cross-section of Stocks," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 2(1), pages 57-87.
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    More about this item

    Keywords

    Bond risk premia; Forward prices; Investor sentiment; Bootstrap standard errors; Wald tests;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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