Bond Risk Premia in Consumption-based Models / Drew D. Creal, Jing Cynthia Wu.

Format:

Book

Author/Creator:

Creal, Drew D.

Contributor:

National Bureau of Economic Research.

Wu, Jing Cynthia.

Series:

Working Paper Series (National Bureau of Economic Research) no. w22183.

NBER working paper series no. w22183

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

Workhorse Gaussian affine term structure models (ATSMs) attribute time-varying bond risk premia entirely to changing prices of risk, while structural models with recursive preferences credit it completely to stochastic volatility. We reconcile these competing channels by introducing a novel form of external habit into an otherwise standard model with recursive preferences. The new model has an ATSM representation with analytical bond prices making it empirically tractable. We find that time variation in bond term premia is predominantly driven by the price of risk, especially, the price of expected inflation risk that co-moves with expected inflation itself.

Notes:

Print version record

April 2016.