Predicting bond return predictability

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Abstract

This paper provides empirical evidence on predictable time variations in out-of-sample bond return predictability. Bond return predictability is associated with periods of high (low) economic activity (uncertainty), which implies that violations of the expectations hypothesis are state- dependent and linked to features of the business cycle. These state-dependencies in predictability, established by introducing 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 utility through a novel dynamic forecast combination scheme that uses predicted forecasting performance to identify the best set of methods to include in the combined forecast. Dynamically combined forecasts exhibit strong countercyclical behavior and peak during recessions.
Original languageEnglish
JournalManagement Science
Volume70
Issue2
Pages (from-to)931-951
Number of pages21
ISSN0025-1909
DOIs
Publication statusPublished - Feb 2024

Keywords

  • bond excess returns
  • equal conditional predictive ability
  • forecast combination
  • multivariate test
  • state dependencies

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