Skip to Main Content
HBS Home
  • About
  • Academic Programs
  • Alumni
  • Faculty & Research
  • Baker Library
  • Giving
  • Harvard Business Review
  • Initiatives
  • News
  • Recruit
  • Map / Directions
Working Knowledge
Business Research for Business Leaders
  • Browse All Articles
  • Popular Articles
  • Cold Call Podcast
  • Managing the Future of Work Podcast
  • About Us
  • Book
  • Leadership
  • Marketing
  • Finance
  • Management
  • Entrepreneurship
  • All Topics...
  • Topics
    • COVID-19
    • Entrepreneurship
    • Finance
    • Gender
    • Globalization
    • Leadership
    • Management
    • Negotiation
    • Social Enterprise
    • Strategy
  • Sections
    • Book
    • Podcasts
    • HBS Case
    • In Practice
    • Lessons from the Classroom
    • Op-Ed
    • Research & Ideas
    • Research Event
    • Sharpening Your Skills
    • What Do You Think?
    • Working Paper Summaries
  • Browse All
    Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds
    12 Mar 2009Working Paper Summaries

    Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

    by John Y. Campbell, Adi Sunderam and Luis M. Viceira
    Are nominal government bonds risky investments that investors must be rewarded to hold? Or are they safe investments, whose price movements are either inconsequential or even beneficial to investors as hedges against other risks? U.S. Treasury bonds have performed well as hedges during the financial crisis of 2008, but the opposite was true in the late 1970's and early 1980's. John Y. Campbell, a Visiting Scholar at HBS, Harvard Ph.D. candidate Adi Sunderam, and HBS professor Luis M. Viceira explore such changes over time in the risks of nominal government bonds. Key concepts include:
    • A changing covariance between nominal and real variables is of central importance in understanding the term structure of nominal interest rates.
    • Analyses of asset allocation traditionally assume that broad asset classes have a stable structure of risk over time; these new results, however, suggest that in the case of nominal bonds, at least, this assumption is seriously misleading.
    LinkedIn
    Email

    Author Abstract

    The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 1953 - 2005, it was particularly high in the early 1980's and negative in the early 2000's. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion, temporary and permanent components of expected inflation, and the covariance between nominal variables and the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. Log nominal bond yields and term premia are quadratic in these state variables, with term premia determined mainly by the product of risk aversion and the nominal-real covariance. The concavity of the yield curve-the level of intermediate-term bond yields, relative to the average of short- and long-term bond yields-is a good proxy for the level of term premia. The nominal-real covariance has declined since the early 1980's, driving down term premia.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: January 2009
    • HBS Working Paper Number: 09-088
    • Faculty Unit(s): Finance
      Trending
        • 09 Dec 2019
        • Research & Ideas

        Identify Great Customers from Their First Purchase

        • 13 Aug 2021
        • Research & Ideas

        Managers, Here’s How to Bond with New Hires Remotely

        • 18 May 2022
        • Research & Ideas

        Are Banks the ‘Bad Guys’? Overdraft Fees Are Crushing Low-Income Customers

        • 25 Feb 2019
        • Research & Ideas

        How Gender Stereotypes Kill a Woman’s Self-Confidence

        • 13 May 2022
        • Research & Ideas

        Company Reviews on Glassdoor: Petty Complaints or Signs of Potential Misconduct?

    Luis M. Viceira
    Luis M. Viceira
    George E. Bates Professor
    Senior Associate Dean, HBS Online; Senior Associate Dean, Executive Education
    Contact
    Send an email
    → More Articles
    Find Related Articles
    • Finance
    • Economics

    Sign up for our weekly newsletter

    Interested in improving your business? Learn about fresh research and ideas from Harvard Business School faculty.
    ǁ
    Campus Map
    Harvard Business School Working Knowledge
    Baker Library | Bloomberg Center
    Soldiers Field
    Boston, MA 02163
    Email: Editor-in-Chief
    →Map & Directions
    →More Contact Information
    • Make a Gift
    • Site Map
    • Jobs
    • Harvard University
    • Trademarks
    • Policies
    • Digital Accessibility
    Copyright © President & Fellows of Harvard College