The Equity Volatility-Volume Ratio and Treasury Bond Returns

We show that the equity volatility-volume ratio (VVR) reliably predicts one-year-ahead excess treasury bond returns, both in- and out-of-sample. We rationalize this finding via a setting where investors in equities are unsure if counterparties are trading on information. When economic state shifts are likely, the probability of receiving informative signals is higher, so trading volume (volatility) is lower (higher). Central banks' reaction to state shifts is uncertain. So when state shifts are more likely, and monetary policy is uncertain, bonds command larger risk premia. We confirm this prediction by showing that monetary policy uncertainty measures predict bond premia beyond VVR.