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Discussion Paper
Estimating the Term Structure of Corporate Bond Risk Premia
Understanding how short- and long-term assets are priced is one of the fundamental questions in finance. The term structure of risk premia allows us to perform net present value calculations, test asset pricing models, and potentially explain the sources of many cross-sectional asset pricing anomalies. In this post, I construct a forward-looking estimate of the term structure of risk premia in the corporate bond market following Jankauskas (2024). The U.S. corporate bond market is an ideal laboratory for studying the relationship between risk premia and maturity because of its large size ...
Discussion Paper
The Shadow Value of Central Bank Lending
After the Great Financial Crisis, the European Central Bank (ECB) extended its monetary policy toolbox to include the use of long-term loans to banks at interest rates close to zero or even negative. These central bank interventions were aimed at supporting the transmission of expansionary monetary policy and likely played a crucial role in bolstering the financial stability of the euro area, namely by reducing the chance of bank runs. However, quantitative evidence on the effects of these interventions on financial stability remains scant. In this post, we quantify the effectiveness of ...
Discussion Paper
Does the Equity Term Structure Respond to Monetary Policy Shocks?
A long-standing body of research, inspired by Bernanke and Kuttner (2005), has documented the effects of Fed interest rate surprises on stock markets. While stock markets provide valuable information about the investor risk premium and dividend growth expectations, researchers have only recently developed more comprehensive tools to estimate the term structure of equity risk premia and dividend growth expectations across a broad range of maturities. In this post, we investigate the impact of monetary policy surprises (or shocks) on short- and long-term estimates of risk premia and growth ...
Report
The Implied Equity Term Structure
We propose a new methodology to estimate the equity term structure. Instead of using realized returns of dividend assets, we generalize the implied cost of capital approach and imply the term structure of ex-ante expected returns from the cross-section of observed stock prices and projected firm-level cash flows. Using US data for 1980-2024, we find an unconditionally upward sloping term structure of risk premia with rich cross-sectional patterns in the size, value and credit risk dimensions. Strikingly, value firms and speculative-grade firms have flat or even downward-sloping term ...