| Abstract: | Between 1954 and 1991, U.S. stocks, long-term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate-term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena. |
