2018•Zhōngguó cáiwù xuékānRequires access
Long-Run Risk, Monetary Policy,and Bond Risk Premium
Shih-Wei Chao
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Abstract
The paper evaluates whether a long-run risk model with endogenous inflation accounts
for the U.S. term structure and bond risk premium across three distinctive historical periods.
In addition to the fit of the average yield curve, the model generates positive bond risk
premium that increases in maturity for all periods and reasonably describes the evolutions of
term premium over time with some quantitative discrepancies. Since the model tightly links
bond risk premium to long-short yields difference, the main challenge is to rationalize large
(small) bond risk premium with small (large) slope of the yield curve.
Key words: Long-run risk, bond risk premium, inflation target, monetary policy shock