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Journal Article
The Term Structure of the Excess Bond Premium: Measures and Implications
In this article, we construct daily aggregate as well as short-, medium-, and long-term "excess bond premium" (EBP) measures using a widely available corporate bond database (known as "TRACE"). The novel EBP measures we construct provide an important gauge of strains in the financial sector at different horizons. We find that the short-term EBP measure increased more dramatically at the peaks of the COVID-19 pandemic and the 2007–09 global financial crisis, but the pattern was reversed around the interest rate liftoff at the end of 2015.
Report
The term structure of the price of variance risk
We empirically investigate the term structure of variance risk pricing and how it varies over time. Estimating the price of variance risk in a stochastic-volatility option pricing model separately for options of different maturities, we find a price of variance risk that decreases in absolute value with maturity but remains significantly different from zero up to the nine-month horizon. We show that the term structure is consistently downward sloping both during normal times and in times of stress, when required compensation for variance risk increases and its term structure steepens further.
Journal Article
The Term Structure of the Excess Bond Premium: Measures and Implications
In this article, we construct daily aggregate as well as short-, medium-, and long-term "excess bond premium" (EBP) measures using a widely available corporate bond database (known as "TRACE"). The novel EBP measures we construct provide an important gauge of strains in the financial sector at different horizons. We find that the short-term EBP measure increased more dramatically at the peaks of the COVID-19 pandemic and the 2007–09 global financial crisis, but the pattern was reversed around the interest rate liftoff at the end of 2015.
Working Paper
Information in Yield Spread Trades
Using positions data on bond futures, I document that speculators' spread trades contain private information about future economic activities and asset prices. Strong steepening trades are associated with negative payroll surprises in subsequent months and can predict asset markets' reaction to future payroll releases, suggesting that speculators hold superior information about future payrolls. Steepening trades can also predict the rise of stock prices within a few hours before subsequent FOMC announcements, implying that the pre-FOMC stock drift is driven by informed speculation. Overall, ...
Working Paper
No-Arbitrage Priors, Drifting Volatilities, and the Term Structure of Interest Rates
We derive a Bayesian prior from a no-arbitrage affine term structure model and use it to estimate the coefficients of a vector autoregression of a panel of government bond yields, specifying a common time-varying volatility for the disturbances. Results based on US data show that this method improves the precision of both point and density forecasts of the term structure of government bond yields, compared to a fully fledged term structure model with time-varying volatility and to a no-change random walk forecast. Further analysis reveals that the approach might work better than an exact term ...
Working Paper
The Equilibrium Term Structure of Equity and Interest Rates
We develop an equilibrium asset pricing model with Epstein-Zin recursive preferences that accounts for major stylized facts of the term structure of bond and equity risk premia. While the term structure of bond risk premia tends to be upward-sloping on average, the term structure of equity risk premia is known to be downward-sloping. {{p}} The equilibrium asset pricing model with long-run consumption risks has difficulty matching these stylized facts simultaneously. The standard calibration of these models follows Bansal and Yaron (2004), in which agents prefer the early resolution of ...
Working Paper
Forward Guidance and Its Effectiveness: A Macro Finance Shadow-Rate Framework
Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary-easing effects on the real ...