What 200 Years of Data Tell Us About the Predictive Variance of Long-Term Bonds

Pasquale Della Corte, Can Gao, Daniel P. A. Preve and Giorgio Valente
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Pasquale Della Corte: Imperial College Business School; Centre for Economic Policy Research (CEPR)
Can Gao: University of St.Gallen; Swiss Finance Institute; Swisss Institute for Banking and Finance
Daniel P. A. Preve: Singapore Management University
Giorgio Valente: Hong Kong Institute for Monetary and Financial Research (HKIMR)

No 25-95, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper investigates the long-horizon predictive variance of an international bondstrategy where a U.S. investor holds unhedged positions in constant-maturity long-term foreign bonds funded at domestic short-term interest rates. Using over two centuries of data from major economies, the study finds that predictive variance grows with the investment horizon, driven primarily by uncertainties in interest rate differentials and exchange rate returns, which outweigh mean reversion effects. The analysis, incorporating both observable and unobservable predictors, highlights that unobservable predictors linked to shifts in monetary and exchange rate regimes are the dominant source of long-term risk, offering fresh insights into international bond investment strategies.

Keywords: Currency risk; Long-term bonds; Predictability; Long-term investments (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Pages: 92 pages
Date: 2025-10
New Economics Papers: this item is included in nep-fdg, nep-for, nep-his, nep-ifn and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2595

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