This paper investigates the role of monetary policy as a source of time-varying priced risk in bond markets. We use individual agents forecasts of Federal Funds, GDP and inflation to construct an empirical proxy for policy shocks from the residuals of Taylor rule regressions. Key to our analysis is a distinction between (pro-cyclical) target rate shocks and (counter-cyclical) path shocks. We show that path shocks account for between 10% − 15% of the variance of one-year expected excess returns on bonds with maturities 2 − 5 years and are also priced in the cross-section of equity returns.JEL classification: G12, E43, E52

This paper studies the link between short‐ and long‐run risk premia. We extract short‐term risk premia from contemporaneous information on short‐term futures and cash equity markets under the assumption of no arbitrage. Predictability regressions reveal that short‐term risk premia capture different information from long‐run risk premia. Counter to the intuition that a high price of risk commands high returns, high short‐run risk premia on dividend claims predict low returns on the index. While inconsistent with models featuring either habit persistence or long‐run risk, the results may be reconciled with some models of uncertainty aversion.

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