Stock Market Liquidity and Bond Risk Premia
Speaker
Abstract
| We assess the effect of equity market liquidity on U.S. bond risk premia. We find that stock market liquidity adds to the well established Cochrane-Piazzesi and Ludvigson-Ng factors. It explains 10%, 9%, 7%, and 7% of the one-year-ahead variation in their excess return for two-, three-, four-, and five-year bonds respectively and increases the adjusted R2 by 3-6% across all maturities over Cochrane and Piazzesi (2005) and Ludvigson and Ng (2009) factors. The effects are highly statistically and economically significant both in and out of sample. We argue that stock market liquidity contains information about expected future business conditions through the investment, flight to liquidity, and macroeconomic channels. Our results support the hypothesis that macroeconomic uncertainty is one of the main determinants of bond risk premia. |
| Contact information: |
| Sebastian Gryglewicz |
| The Brown Bag Seminars are sponsored by ERIM. |
| www.eur.nl/financegroup |
