Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Faculty & Research
  • Faculty
  • Research
  • Featured Topics
  • Academic Units
  • …→
  • Harvard Business School→
  • Faculty & Research→
Publications
Publications
  • January – March 2012
  • Article
  • International Journal of Forecasting

Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates

By: Luis M. Viceira
  • Format:Print
  • | Pages:21
ShareBar

Abstract

This paper explores time variation in bond risk, as measured by the covariation of bond returns with stock returns and with consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yield on long-term bonds and short-term bonds forecasts positively future excess returns on bonds at varying horizons, and that the short-term nominal interest rate forecasts positively stock return volatility and exchange rate volatility. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with larger discount rate risk for bonds. The short rate forecasts only the discount rate component of bond beta.

Keywords

Bonds; Volatility; Forecasting and Prediction; Interest Rates; Inflation and Deflation; Investment Return; Risk and Uncertainty; Currency Exchange Rate; Cash Flow; Stocks

Citation

Viceira, Luis M. "Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates." International Journal of Forecasting 28, no. 1 (January–March 2012): 97–117.
  • Find it at Harvard
  • Read Now

About The Author

Luis M. Viceira

Finance
→More Publications

More from the Author

    • May 2025
    • Faculty Research

    RTX's Lifetime Income Strategy: Shaping the Future of Retirement

    By: Daniel Green, Luis M. Viceira and Sarah Mehta
    • January 2025
    • Faculty Research

    Index and Active Investing: Vanguard and the New Frontier of Active ETFs

    By: Marco Sammon and Luis M. Viceira
    • January 2025
    • Faculty Research

    Technical Note on Mutual Funds and Exchange Traded Funds (ETFs)

    By: Marco Sammon, Luis M. Viceira and Jonathan Kanagasabai
More from the Author
  • RTX's Lifetime Income Strategy: Shaping the Future of Retirement By: Daniel Green, Luis M. Viceira and Sarah Mehta
  • Index and Active Investing: Vanguard and the New Frontier of Active ETFs By: Marco Sammon and Luis M. Viceira
  • Technical Note on Mutual Funds and Exchange Traded Funds (ETFs) By: Marco Sammon, Luis M. Viceira and Jonathan Kanagasabai
ǁ
Campus Map
Harvard Business School
Soldiers Field
Boston, MA 02163
→Map & Directions
→More Contact Information
  • Make a Gift
  • Site Map
  • Jobs
  • Harvard University
  • Trademarks
  • Policies
  • Accessibility
  • Digital Accessibility
Copyright © President & Fellows of Harvard College.