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Fiscal policy driven bond risk premia

Journal

Journal of Financial Economics

Subject

Finance

Publishing details

Journal of Financial Economics 2020 Vol 138:1 p 53-73

Authors / Editors

Bretscher L;Hsu A;Tamoni A

Publication Year

2020

Abstract

Fiscal policy matters for bond risk premia. Empirically, government spending level and uncertainty predict bond excess returns, as well as term structure level and slope movements. Shocks to government spending level and uncertainty are also priced in the cross-section of bond and stock portfolios. Theoretically, government spending level shocks raise inflation when marginal utility is high, thus generating positive inflation risk premia (term structure level effect). Uncertainty shocks steepen the yield curve (slope effect), producing positive term premia. These effects are consistent with evidence from a structural vector autoregression. Asset pricing tests using model simulated data corroborate our empirical findings.

Keywords

Term structure; Bond risk premia; Fiscal policy; Uncertainty

Available on ECCH

No


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