Macro-expectations, aggregate uncertainty, and expected term premia

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10064.pdf Non-technical summaryThe empirical term structure literature shows that long-term interest rates are not merely We empirically show that expectations about risk premia are significantly influenced by expectations about real macroeconomic activity (such as GDP), while nominal factors (such as inflation expectations) play a minor role. The uncertainty of forecasters about future business cycle movements also has a pronounced effect on risk premium expectations.Our results indicate that expected risk premia are positively correlated with expectations about GDP and inflation. Higher uncertainty with respect to macroeconomic variables also increases expected risk premia. We also examine how the shape of the yield curve is related to expected risk premia. For instance, the curvature of the yield curve can be explained by information which is also captured by the expected change in risk premia of forecasters in the SPF.Finally, we show that the expected changes in risk premia actually do forecast bond excess returns. This underlines that our proxy for risk premium expectations is indeed informative for developments in bond markets. AbstractBased on individual expectations from the Survey of Professional Forecasters, we construct a real-time proxy for expected term premium changes on long-term bonds. We empirically investigate the relation of these bond term premium expectations with expectations about key macroeconomic variables as well as aggregate macroeconomic uncertainty at the level of individual forecasters. We find that expected term premia are (i) time-varying and reasonably persistent, (ii) strongly related to expectations about future output growth, and (iii) positively affected by uncertainty about future output growth and inflation rates. Expectations about real macroeconomic variables seem to matter more than expectations about nominal factors. Additional findings on term structure factors suggest that the level and slope factor capture information related to uncertainty about real and nominal macroeconomic prospects, and that curvature is related to subjective term premium expectations themselves. Finally, an aggregate measure of forecasters' term premium expectations has predictive power for bond excess returns over horizons of up to one year.JEL-Classification: E43, E44, G12

Expected Business Conditions and Bond Risk Premia

“…As mentioned in the introduction, such an approach complements a large literature relying on survey information for forecasting and understanding bond market dynamics. While studies such as Chun (2011), Wright (2011), Chernov and Mueller (2012, Dick et al (2013), Piazzesi et al (2013), and Joslin et al (2014) rely on survey forecasts to understand yield dynamics and improve term premia estimates, we follow the tradition of, among others, Cochrane and Piazzesi (2005) and Ludvigson and Ng (2009) and study the predictive ability of survey forecasts for bond risk premia directly in a predictive regression framework.…”

“…A related result is established in Altavilla, Giacomini, and Constantini (2014) whose monetary policy expectations, however, are extracted from federal funds rate futures. Dick, Schmeling, and Schrimpf (2013) use forecasters' subjective yield expectations to construct a real-time proxy for expected term premia that predicts future bond risk premia. A similar approach is found in Piazzesi, Salomao, and Schneider (2013).…”

Impact of Financial Market Uncertainty on Market Returns: A Global Analysis

“…Indeed several studies were conducted over it to explore this difference. While we discussed about the empirical studies they mostly relied on proxies of uncertainties which are directly observable like stock return of their implied/realized volatility (i-e., VIX or VXO) the cross sectional dispersion of firms profits (Bloom, 2009), estimated time-varying productivity (Bloom et al, 2013), the cross-sectional dispersion of survey-based forecasts (Dick, Schmeling, & Schrimpf, 2013;Bachmann, Elstner, & Sims, 2013), credit spreads (Fendoǧlu, 2014). On the other hand (Scotti, 2016 they provide crucial intuitions to the comprehension of uncertainty and serve as a dependable starting point for exploring the reasons of hitting economic variables by the uncertainty in an economy.…”

The Impact of the Financial Crisis on Corporate Capital Structure Dynamics in the Nordic Countries

“…The financial crisis are characterized by the uncertainty and risks, which results in increasing risk premiums and falling expected returns and resultantly lenders and borrowers do not want lock-in capital in long-term investments. Dick et al (2013) find that due to enhanced default probabilities, the long-term debt loses its relevance in comparison to the short-term debt, for example, financial intermediaries may be more demanding with respect to higher proportion of lending margins, selection and value of collaterals and increase in risk premium (also see, for example, Demirguc-Kunt et al 2015;Diamond, 2004). However, the increased reliance on short-term debt during the financial crisis, due to the lack of commitment of both borrowers and lenders with respect to the long-term borrowing, can increase the cost of debt because of the increased demand for the short-term debt, rolling over cost of debt and transaction costs (Brunnermeier and Oehmke, 2012).…”