TY  - JOUR
AU  - Campbell,John Y.
AU  - Sunderam,Adi
AU  - Viceira,Luis M.
TI  - Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14701
PY  - 2009
Y2  - February 2009
UR  - http://www.nber.org/papers/w14701
L1  - http://www.nber.org/papers/w14701.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Adi Sunderam
Baker Library 245
Harvard Business School
Boston, MA 02163
E-Mail: asunderam@hbs.edu

Luis M. Viceira
George E. Bates Professor
Harvard Business School
Baker Library 367
Boston, MA 02163
Tel: 617/495-6331
Fax: 617/496-7379
E-Mail: lviceira@hbs.edu
AB  - The covariance between US Treasury bond returns and stock returns has moved considerably over time.  While it was slightly positive on average in the period 1953-2005, it was particularly high in the early 1980's and negative in the early 2000's.  This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion, temporary and permanent components of expected inflation, and the covariance between nominal variables and the real economy.  The last of these state variables enables the model to fit the changing covariance of bond and stock returns.  Log nominal bond yields and term premia are quadratic in these state variables, with term premia determined mainly by the product of risk aversion and the nominal-real covariance. The concavity of the yield curve -- the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields -- is a good proxy for the level of term premia.  The nominal-real covariance has declined since the early 1980's, driving down term premia.
ER  -