Predicting bond return predictability

Publikation: Working paperForskning

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  • rp20_09

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We document predictable shifts in bond return predictability. Bond returns are predictable in high (low) economic activity (uncertainty) states, implying that the expectations hypothesis of the term structure holds periodically. These predictable performance differences, established using a new multivariate test for equal conditional predictive ability, can be used in real-time to improve out-of-sample bond risk premia estimates and investors’ economic value by means of a novel dynamic forecast combination scheme. Consistent with standard financial theory, the resulting forecasts are strongly countercyclical and peaks in recessions. The empirical findings are explained within a non-linear term structure model.
OriginalsprogEngelsk
UdgivelsesstedAarhus
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider112
StatusUdgivet - jul. 2020
SerietitelCREATES Research Papers
Nummer2020-09

    Forskningsområder

  • Bond excess returns, Forecasting, State-dependencies, Multivariate test, Equal conditional predictive ability

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