Out-of-sample bond risk premium predictions: A global common factor

Xiaoneng Zhu

Journal of International Money and Finance, 2015, vol. 51, issue C, 155-173

Abstract: This paper investigates the out-of-sample predictability of international bond risk premia. We endogenously construct a global common Cochrane and Piazzesi (2005) factor. We find that the global factor strongly predicts international bond risk premia and delivers economically significant gains relative to the historical average. The forecasting power of the global factor is above and beyond the predictive power contained in country-specific factors. As predicted by economic theories, bond return forecasts appear countercyclical. We also find that the global factor is related to international economic activity.

Keywords: Bond risk premia; Economic value; Global common factor; Return predictability; Out-of-sample forecasts (search for similar items in EconPapers)
JEL-codes: E4 F3 G1 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:51:y:2015:i:c:p:155-173

DOI: 10.1016/j.jimonfin.2014.11.004

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