Bond return predictability in expansions and recessions

Tom Engsted, Stig V. Møller () and Magnus Sander ()
Additional contact information
Stig V. Møller: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Magnus Sander: Aarhus University and CREATES, Postal: Department of Economics and Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: We document that over the period 1953-2011 US bond returns are predictable in expansionary periods but unpredictable during recessions. This result holds in both in-sample and out-of-sample analyses and using both univariate regressions and combination forecasting techniques. A simulation study shows that our tests have power to reject unpredictability in both expansions and recessions. To judge the economic significance of the results we compute utility gains for a meanvariance investor who takes the predictability patterns into account and show that utility gains are positive in expansions but negative in recessions. The results are also consistent with tests showing that the expectations hypothesis of the term structure holds in recessions but not in expansions. However, the results for bonds are in sharp contrast to results for stocks showing that stock returns are predictable in recessions but not in expansions. Thus, our results indicate that there is not a common predictive pattern of stock and bond returns associated with the state of the economy.

Keywords: Return predictability; expansions and recessions; out-of-sample tests; power properties; mean-variance investor; expectations hypothesis. (search for similar items in EconPapers)
JEL-codes: C53 G12 (search for similar items in EconPapers)
Pages: 39
Date: 2013
New Economics Papers: this item is included in nep-fmk and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://repec.econ.au.dk/repec/creates/rp/13/rp13_13.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2013-13

Access Statistics for this paper

More papers in CREATES Research Papers from Department of Economics and Business Economics, Aarhus University
Bibliographic data for series maintained by ().