Predicting bond return predictability

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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.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages112
Publication statusPublished - 4 Aug 2020
SeriesCREATES Research Papers
Number2020-09

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