International Economics & Geopolitics Seminar with Carolin Pflueger (UChicago)
Risk and Return in Government Bonds
The Columbia International Economics & Geopolitics Seminar, organized by Jeff Frieden and Alan Taylor and supported by the Center for Political Economy, the Institute for Global Politics, and the Institute for Social and Economic Research and Policy (ISERP), is pleased to host Professor Carolin Pflueger (UChicago) to present a work in progress entitled "Risk and Return in Government Bonds.”
Abstract:
As the risks of government bonds change over time, does this change the compensation that investors require for holding them? While realized excess returns show little relation to bond risk, we find that subjective expected excess returns constructed from professional forecasts of future long-term yields are tightly linked to bonds’ stock market betas, consistent with a CAPM-style relation. In a U.S. month-by-maturity panel from 1988–2024, the correlation of subjective excess returns with rolling bond–stock betas is 66%. The estimated market price of risk is comparable to the equity premium and stable when controlling for time and maturity fixed effects. Realized excess returns are predicted by subjective excess returns, but this predictability is driven by higher-frequency variation and not by betas. Similar results hold in an international panel of developed countries from 1989–2024. The change in betas from positive to negative accounts for half of the decline in long-term U.S. Treasury yields from the 1980s to the 2010s and implies a negative term premium as early as 2001. During quantitative easing episodes, the price of bond risk declines, suggesting an increased investor willingness to bear risk.
