This can be a second publish from a set of feedback I gave on the NBER Asset Pricing convention in early November at Stanford. Convention agenda right here. My full slides right here. First publish right here, on new-Keynesian fashions
I commented on “Downward Nominal Rigidities and Bond Premia” by François Gourio and Phuong Ngo. The paper was about bond premiums. Commenting made me notice that I believed I understood the problem, and now I notice I do not in any respect. Understanding time period premiums nonetheless appears a fruitful space of analysis in spite of everything these years.
I believed I understood danger premiums
The time period premium query is, do you earn extra money on common holding long run bonds or short-term bonds? Associated, is the yield curve on common upward or downward sloping? Ought to an investor maintain lengthy or brief time period bonds?
1. To start with there was the imply variance frontier and the CAPM.
Long run bonds have an virtually stock-like normal deviation (round 10%, 16% for shares) with a imply return barely above that of money or brief time period bonds. They seem like yucky investments.
3. That too is simplistic, due to course I am trying once more at variance not beta. Now, inflation reliably falls in recessions (see graph). Rates of interest additionally fall in recessions, so bond costs rise. Which means bonds are nice negative-beta investments. Bonds total ought to have very low returns. And this sample has grow to be a lot stronger because the 1980s, so bond returns ought to have gone down.