Bond Risk Premia

John Cochrane and Monika Piazzesi

American Economic Review, 2005, vol. 95, issue 1, 138-160

Abstract: We study time variation in expected excess bond returns. We run regressions of one-year excess returns on initial forward rates. We find that a single factor, a single tent-shaped linear combination of forward rates, predicts excess returns on one- to five-year maturity bonds with R2 up to 0.44. The return-forecasting factor is countercyclical and forecasts stock returns. An important component of the return-forecasting factor is unrelated to the level, slope, and curvature movements described by most term structure models. We document that measurement errors do not affect our central results.

Date: 2005
Note: DOI: 10.1257/0002828053828581
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