A Factor Analysis of Bond Risk Premia

Sydney Ludvigson and Serena Ng ()

No 15188, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses the factor augmented regression framework to analyze the relation between bond excess returns and the macro economy. Using a panel of 131 monthly macroeconomic time series for the sample 1964:1-2007:12, we estimate 8 static factors by the method of asymptotic principal components. We also use Gibb sampling to estimate dynamic factors from the 131 series reorganized into 8 blocks. Regardless of how the factors are estimated, macroeconomic factors are found to have statistically significant predictive power for excess bond returns. We show how a bias correction to the parameter estimates of factor augmented regressions can be obtained. This bias is numerically trivial in our application. The predictive power of real activity for excess bond returns is robust even after accounting for finite sample inference problems. Forecasts of excess bond returns (or bond risk premia) are countercyclical. This implies that investors are compensated for risks associated with recessions.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2009-07
New Economics Papers: this item is included in nep-ecm and nep-fmk
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published as "A Factor Analysis of Bond Risk Premia" (with Serena Ng). Handbook of Empirical Economics and Finance, 2010, e.d. by Aman Uhla and David E. A. Giles, pp. 313-372. Chapman and Hall, Boca Raton, FL.

Downloads: (external link)
http://www.nber.org/papers/w15188.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:nbr:nberwo:15188

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15188

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().