Hostname: page-component-586b7cd67f-g8jcs Total loading time: 0 Render date: 2024-12-02T19:35:33.150Z Has data issue: false hasContentIssue false
  • English
  • Français

Equity Trading Activity and Treasury Bond Risk Premia

Published online by Cambridge University Press:  04 May 2022

Stefanie Schraeder ,
Elvira Sojli ,
Avanidhar Subrahmanyam  and
Wing W. Tham
Stefanie Schraeder
Affiliation:
University of Vienna Department of Finance [email protected]
Elvira Sojli*
Affiliation:
University of New South Wales School of Banking and Finance
Avanidhar Subrahmanyam
Affiliation:
University of California Los Angeles Anderson School of Management [email protected]
Wing W. Tham
Affiliation:
University of New South Wales School of Banking and Finance [email protected]
*
[email protected] (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We link equity and treasury bond markets via an informational channel. When macroeconomic state shifts are more probable, informed traders are more likely to have valid signals about fundamentals, so that uninformed traders are less willing to trade against informed ones. This implies low volume and high volatility, that is, a high volatility–volume ratio (VVR). Central banks react to state shifts, but their actions are uncertain. Therefore, a higher state shift likelihood implies larger bond risk premia. These arguments together imply that VVR should positively predict bond excess returns. We empirically test and confirm this prediction, both in- and out-of-sample.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 2 , March 2023 , pp. 677 - 710
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to Hendrik Bessembinder (the editor) and Sunil Wahal (the referee) for insightful and constructive comments. We also thank Andrea Eisfeldt, Jean-Sebastian Fontaine, Chotibhak (Pab) Jotikasthira, Phillippe Mueller, Pierre-Olivier Weill, participants at the 2017 Conference on the Econometrics of Financial Markets, the 2017 Behavioural Finance and Capital Markets Conference, the 2017 Finance Research Network Meeting, the seminars at University of Melbourne and University of Memphis, and the brown bag seminars in UCLA and UNSW for helpful comments. We are especially grateful to Kees Bouwman for long discussions on modeling bond premia. We are very grateful to Michael Fleming for providing the data on treasury market trading volumes, to Sydney Ludvigson for updating the LN factor data to allow for up-to-date analysis, and to Allan Timmermann for the monthly bond returns. This article supersedes the article titled “Stock Market Illiquidity, Funding Liquidity, and Bond Risk Premia.”

References

Adrian, T.; Fleming, M.; and Vogt, E.. “An Index of Treasury Market Liquidity: 1991–2017.” Working Paper, Federal Reserve Bank of New York (2017).Google Scholar
Akbas, F. “The Calm Before the Storm.” Journal of Finance, 71 (2016), 225–266.CrossRefGoogle Scholar
Albuquerque, R.; De Francisco, E.; and Marques, L. B.. “Marketwide Private Information in Stocks: Forecasting Currency Returns.” Journal of Finance, 63 (2008), 2297–2343.CrossRefGoogle Scholar
Amihud, Y. “Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Amihud, Y., and Hurvich, C. M.. “Predictive Regressions: A Reduced-Bias Estimation Method.” Journal of Financial and Quantitative Analysis, 39 (2004), 813–841.CrossRefGoogle Scholar
Amihud, Y., and Mendelson, H.. “Liquidity, Maturity, and the Yields on U.S. Treasury Securities.” Journal of Finance, 46 (1991), 1411–1425.CrossRefGoogle Scholar
Anderson, A.-M., and Dyl, E. A.. “Market Structure and Trading Volume.” Journal of Financial Research, 28 (2005), 115–131.CrossRefGoogle Scholar
Atkins, A. B., and Dyl, E. A.. “Market Structure and Reported Trading Volume: NASDAQ versus the NYSE.” Journal of Financial Research, 20 (1997), 291–304.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Investor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 1645–1680.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Comovement and Predictability Relationships Between Bonds and the Cross-Section of Stocks.” Review of Asset Pricing Studies, 2 (2012), 57–87.CrossRefGoogle Scholar
Banerjee, S., and Green, B.. “Signal or Noise? Uncertainty and Learning About Whether Other Traders are Informed.” Journal of Financial Economics, 117 (2015), 398–423.CrossRefGoogle ScholarPubMed
Bauer, M. D., and Hamilton, J. D.. “Robust Bond Risk Premia.” Review of Financial Studies, 31 (2017), 399–448.CrossRefGoogle Scholar
Brenner, M.; Pasquariello, P.; and Subrahmanyam, M.. “On the Volatility and Comovement of US Financial Markets Around Macroeconomic News Announcements.” Journal of Financial and Quantitative Analysis, 44 (2009), 1265–1289.CrossRefGoogle Scholar
Brunnermeier, M. K., and Pedersen, L. H.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies, 22 (2009), 2201–2238.CrossRefGoogle Scholar
Campbell, J. Y.; Grossman, S. J.; and Wang, J.. “Trading Volume and Serial Correlation in Stock Returns.” Quarterly Journal of Economics, 108 (1993), 905–939.CrossRefGoogle Scholar
Campbell, J. Y.; Pflueger, C.; and Viceira, L. M.. “Macroeconomic Drivers of Bond and Equity Risks.” Journal of Political Economy, 128 (2020), 3148–3185.CrossRefGoogle Scholar
Chordia, T.; Roll, R.; and Subrahmanyam, A.. “Commonality in Liquidity.” Journal of Financial Economics, 56 (2000), 3–28.CrossRefGoogle Scholar
Chordia, T.; Sarkar, A.; and Subrahmanyam, A.. “An Empirical Analysis of Stock and Bond Market Liquidity.” Review of Financial Studies, 18 (2005), 85–129.Google Scholar
Clark, T. E., and West, K. D.. “Approximately Normal Tests for Equal Predictive Accuracy in Nested Models.” Journal of Econometrics, 138 (2007), 291–311.CrossRefGoogle Scholar
Cochrane, J. H. “Presidential Address: Discount Rates.” Journal of Finance, 66 (2011), 1047–1108.CrossRefGoogle Scholar
Cochrane, J., and Piazzesi, M.. “Bond Risk Premia.” American Economic Review, 95 (2005), 138–160.CrossRefGoogle Scholar
David, A., and Veronesi, P.. “Investors’ and Central Bank’s Uncertainty Embedded in Index Options.” Review of Financial Studies, 27 (2014), 1661–1716.Google Scholar
Du, W.; Pflueger, C. E.; and Schreger, J.. “Sovereign Debt Portfolios, Bond Risks, and the Credibility of Monetary Policy.” Journal of Finance, 75 (2020), 3097–3138.CrossRefGoogle Scholar
Duffee, G. “Bond Pricing and the Macroeconomy.” In Handbook of the Economics of Finance, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, Netherlands: North Holland (2012).Google Scholar
Easley, D.; O’Hara, M.; and Yang, L.. “Differential Access to Price Information in Financial Markets.” Journal of Financial and Quantitative Analysis, 51 (2016), 1071–1110.CrossRefGoogle Scholar
Evans, M. D., and Lyons, R. K.. “How is Macro News Transmitted to Exchange Rates?” Journal of Financial Economics, 88 (2008), 26–50.CrossRefGoogle Scholar
Fleming, J.; Kirby, C.; and Ostdiek, B.. “Information and Volatility Linkages in the Stock, Bond, and Money Markets.” Journal of Financial Economics, 49 (1998), 111–137.CrossRefGoogle Scholar
Fontaine, J.-S., and Garcia, R.. “Bond Liquidity Premia.” Review of Financial Studies, 25 (2012), 1207–1254.Google Scholar
Gao, F.; Song, F.; and Wang, J.. “Rational Expectations Equilibrium with Uncertain Proportion of Informed Traders.” Journal of Financial Markets, 16 (2013), 387–413.CrossRefGoogle Scholar
Gargano, A.; Pettenuzzo, D.; and Timmermann, A.. “Bond Return Predictability: Economic Value and Links to the Macroeconomy.” Management Science, 65 (2019), 508–540.CrossRefGoogle Scholar
Ghysels, E., and Wright, J. H.. “Forecasting Professional Forecasters.” Journal of Business & Economic Statistics, 27 (2009), 504–516.CrossRefGoogle Scholar
Giacomini, R., and White, H.. “Tests of Conditional Predictive Ability.” Econometrica, 74 (2006), 1545–1578.CrossRefGoogle Scholar
Goyenko, R. Y.; Holden, C. W.; and Trzcinka, C. A.. “Do Liquidity Measures Measure Liquidity?” Journal of Financial Economics, 92 (2009), 153–181.CrossRefGoogle Scholar
Goyenko, R.; Subrahmanyam, A.; and Ukhov, A.. “The Term Structure of Bond Market Liquidity and its Implications for Expected Bond Returns.” Journal of Financial and Quantitative Analysis, 46 (2011), 111–139.CrossRefGoogle Scholar
Greenwood, R., and Vayanos, D.. “Price Pressure in the Government Bond Market.” American Economic Review, 100 (2010), 585–590.CrossRefGoogle Scholar
Gurkaynak, R. S.; Sack, B.; and Wright, J. H.. “The U.S. Treasury Yield Curve: 1961 to the Present.” Journal of Monetary Economics, 54 (2007), 2291–2304.CrossRefGoogle Scholar
Hamilton, J. D. “Why You Should Never Use the Hodrick–Prescott Filter.” Review of Economics and Statistics, 100 (2018), 831–843.CrossRefGoogle Scholar
Harris, M., and Raviv, A.. “Differences of Opinion Make a Horse Race.” Review of Financial Studies, 6 (1993), 473–506.CrossRefGoogle Scholar
Hasbrouck, J. “Trading Costs and Returns for U.S. Equities: Estimating Effective Costs from Daily Data.” Journal of Finance, 64 (2009), 1445–1477.CrossRefGoogle Scholar
Hodrick, R. J. “Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement.” Review of Financial Studies, 5 (1992), 357–386.CrossRefGoogle Scholar
Hu, X.; Pan, J.; and Wang, J.. “Noise as Information for Illiquidity.” Journal of Finance, 68 (2013), 2341–2382.CrossRefGoogle Scholar
Kandel, E., and Pearson, N. D.. “Differential Interpretation of Public Signals and Trade in Speculative Markets.” Journal of Political Economy, 103 (1995), 831–872.CrossRefGoogle Scholar
Kiyotaki, N., and Moore, J.. “Liquidity, Business Cycles, and Monetary Policy.” Journal of Political Economy, 127 (2019), 2926–2966.CrossRefGoogle Scholar
Koijen, R. S.; Lustig, H.; and Van Nieuwerburgh, S.. “The Cross-Section and Time Series of Stock and Bond Returns.” Journal of Monetary Economics, 88 (2017), 50–69.CrossRefGoogle Scholar
Laborda, R., and Olmo, J.. “Investor Sentiment and Bond Risk Premia.” Journal of Financial Markets, 18 (2014), 206–233.CrossRefGoogle Scholar
Le, A., and Singleton, K. J.. “The Structure of Risks in Equilibrium Fffine Models of Bond Yields.” Working Paper, Stanford University (2013).Google Scholar
Li, H.; Wang, J.; Wu, C.; and He, Y.. “Are Liquidity and Information Risks Priced in the Treasury Bond Market?” Journal of Finance, 64 (2009), 467–503.CrossRefGoogle Scholar
Lou, X., and Shu, T.. “Price Impact or Trading Volume: Why is the Amihud (2002) Measure Priced?” Review of Financial Studies, 30 (2017), 4481–4520.CrossRefGoogle Scholar
Ludvigson, S., and Ng, S.. “Macro Factors in Bond Risk Premia.” Review of Financial Studies, 22 (2009), 5027–5067.CrossRefGoogle Scholar
Menkhoff, L.; Sarno, L.; Schmeling, M.; and Schrimpf, A.. “Information Flows in Foreign Exchange Markets: Dissecting Customer Currency Trades.” Journal of Finance, 71 (2016), 601–634.CrossRefGoogle Scholar
Næs, R.; Skjeltorp, J. A.; and Ødegaard, B. A.. “Stock Market Liquidity and the Business Cycle.” Journal of Finance, 66 (2011), 139–176.CrossRefGoogle Scholar
Nguyen, G.; Engle, R.; Fleming, M.; and Ghysels, E.. “Liquidity and Volatility in the U.S. Treasury Market.” Journal of Econometrics, 217 (2020), 207–229.CrossRefGoogle Scholar
Odean, T. “Volume, Volatility, Price, and Profit When All Traders are Above Average.” Journal of Finance, 53 (1998), 1887–1934.CrossRefGoogle Scholar
Pasquariello, P.; Roush, J.; and Vega, C.. “Government Intervention and Strategic Trading in the U.S. Treasury Market.” Journal of Financial and Quantitative Analysis, 55 (2020), 117–157.CrossRefGoogle Scholar
Pasquariello, P., and Vega, C.. “The On-the-Run Liquidity phenomenon.” Journal of Financial Economics, 92 (2009), 1–24.CrossRefGoogle Scholar
Pastor, L., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.CrossRefGoogle Scholar
Rime, D.; Sarno, L.; and Sojli, E.. “Exchange Rate Forecasting, Order Flow and Macroeconomic Information.” Journal of International Economics, 80 (2010), 72–88.CrossRefGoogle Scholar
Stambaugh, R. F. “Predictive Regressions.” Journal of Financial Economics, 54 (1999), 375–421.Google Scholar
Svensson, L. “Estimating and Interpreting Forward Interest Rates: Sweden 1992–1994.” NBER Working Paper No. 4871 (1994).Google Scholar
Van Nieuwerburgh, S., and Veldkamp, L.. “Information Immobility and the Home Bias Puzzle.” Journal of Finance, 64 (2009), 1187–1215.CrossRefGoogle Scholar
Wang, J. “A Model of Competitive Stock Trading Volume.” Journal of Political Economy, 102 (1994), 127–168.CrossRefGoogle Scholar
Wei, M., and Wright, J. H.. “Reverse Regressions and Long-Horizon Forecasting.” Journal of Applied Econometrics, 28 (2013), 353–371.CrossRefGoogle Scholar
Welch, I., and Goyal, A.. “A Comprehensive Look at the Empirical Performance of Equity Premium Prediction.” Review of Financial Studies, 21 (2008), 1455–1508.CrossRefGoogle Scholar
Supplementary material: PDF

Schraeder et al. supplementary material

Schraeder et al. supplementary material

Download Schraeder et al. supplementary material(PDF)
PDF 359.4 KB