Variants of consumption‐wealth ratios and predictability of U.S. government bond risk premia

Oguzhan Cepni, Rangan Gupta and Mark Wohar ()

International Review of Finance, 2021, vol. 21, issue 2, 661-674

Abstract: This paper compares the ability of alternative consumption‐wealth ratios, based on constant parameter (cay), Markov‐switching (cay MS), and time‐varying parameter (cay TVP) cointegration estimation of the consumption function, for predicting in‐ and out‐of‐sample movements of quarterly excess returns of U.S. government bonds over 1953:Q2 to 2015:Q3. Our findings show that after controlling for standard financial and macroeconomic factors, cay outperforms the cay MS and cay TVP in predicting the path of excess returns on bonds.

Date: 2021
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