Predicting bond return predictability

Daniel Borup, Jonas Nygaard Eriksen, Mads M. Kjær () and Martin Thyrsgaard ()
Additional contact information
Mads M. Kjær: Aarhus University and CREATES, Postal: Department of Economics and Business Economics, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Martin Thyrsgaard: Northwestern University and CREATES, Postal: Kellogg School of Management, Northwestern University, 2211 Campus dr, Evanston, IL 60208, USA

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

Abstract: 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.

Keywords: Bond excess returns; forecasting; state-dependencies; multivariate test; equal conditional predictive ability (search for similar items in EconPapers)
JEL-codes: C12 C52 E43 E44 G12 (search for similar items in EconPapers)
Pages: 110
Date: 2020-08-04
New Economics Papers: this item is included in nep-fmk, nep-for, nep-mac and nep-ore
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https://repec.econ.au.dk/repec/creates/rp/20/rp20_09.pdf (application/pdf)

Related works:
Journal Article: Predicting Bond Return Predictability (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:aah:create:2020-09

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