Bond risk premia and the return forecasting factor

Gutierrez Agustin, Constantino Hevia and Martin Sola
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Gutierrez Agustin: University of Chicago, Economics, Chicago, IL, United States of America

Studies in Nonlinear Dynamics & Econometrics, 2020, vol. 24, issue 1, 12

Abstract: The return forecasting factor is a linear combination of forward rates that seems to predict 1-year excess bond returns of bond of all maturities better than traditional measures obtained from the yield curve. If this single factor actually captures all the relevant fluctuations in bond risk premia, then it should also summarize all the economically relevant variations in excess returns considering different holding periods. We find that it does not. We conclude that including the return forecasting factor as the main driver of risk premia in a term structure model, as has been suggested, is not supported by the data.

Keywords: affine term structure models; bond risk premia; excess returns; return forecasting factor (search for similar items in EconPapers)
Date: 2020
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Working Paper: Bond Risk Premia and the ”Return Forecasting Factor” (2018)
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DOI: 10.1515/snde-2018-0009

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