TY  - JOUR
AU  - Bansal,Ravi
AU  - Shaliastovich,Ivan
TI  - A Long-Run Risks Explanation of Predictability Puzzles in Bond and Currency Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18357
PY  - 2012
Y2  - September 2012
UR  - http://www.nber.org/papers/w18357
L1  - http://www.nber.org/papers/w18357.pdf
N1  - Author contact info:
Ravi Bansal
Fuqua School of Business
Duke University
1 Towerview Drive
Durham, NC 27708
Tel: 919/660-7758
Fax: 919/660-8038
E-Mail: ravi.bansal@duke.edu

Ivan Shaliastovich
The Wharton School
University of Pennsylvania
2423 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
Tel: 25-746-0005
E-Mail: ishal@wharton.upenn.edu
AB  - We show that bond risk-premia rise with uncertainty about expected inflation and fall with uncertainty about expected growth; the magnitude of return predictability using these two uncertainty measures is similar to that by multiple yields. Motivated by this evidence, we develop and estimate a long-run risks model with time-varying volatilities of expected growth and inflation. The model simultaneously accounts for bond return predictability and violations of uncovered interest parity in currency markets. We find that preference for early resolution of uncertainty, time-varying volatilities, and non-neutral effects of inflation on growth are important to account for these aspects of asset markets.
ER  -