Financial conditions,macroeconomic factors and disaggregated bond excess returns |
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| Institution: | 1. Deutsche Bundesbank, Financial Stability Department, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany;2. German Institute for Economic Research (DIW Berlin), 10108 Berlin, Germany;3. Humboldt-Universität zu Berlin, Germany;1. Department of Business Administration, Universidad Carlos III, Spain;2. D.G.A. Supervisión – Banco de España, Spain;1. School of Mathematical Sciences, University of Science and Technology of China, Hefei, Anhui Province 230026, China;2. Department of Industrial Engineering and Operations Research, Columbia University, New York, NY 10027, United States |
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| Abstract: | Bond excess returns can be predicted by macro factors, however, large parts remain still unexplained. We apply a novel term structure model to decompose bond excess returns into expected excess returns (risk premia) and the innovation part. In order to explore these risk premia and innovations, we complement macro variables by financial condition variables as possible determinants of bond excess returns. We find that the expected part of bond excess returns is driven by macro factors, whereas innovations seem to be mainly influenced by financial conditions, before and after the financial crisis. Thus, financial conditions, such as financial stress, deserve attention when analyzing bond excess returns. |
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| Keywords: | Financial conditions Bond excess returns Term premia |
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