Reexamining time-varying bond risk premia in the post-financial crisis era

Han Zhang, Xiaoyun Fan, Bin Guo and Wei Zhang

Journal of Economic Dynamics and Control, 2019, vol. 109, issue C

Abstract: Since the 2008 financial crisis, international interest rates have moved trivially over time, and have become less autocorrelated. Some previous empirical findings are thus no longer valid. This paper reexamines the changes in interest rate dynamics and the bond risk premia predictability for international markets. In contrast with previous studies, we document that the single forward rate displays statistically and economically significant in-sample and out-of-sample forecasting power on bond excess returns since the financial crisis. The good performance of the single forward rate means that forecasts tend to be more idiosyncratic, that is, most of variation in n-year expected excess return corresponds to n-year forward rate, rather than forward rates with other maturities. Calibrating an affine model suggests that the weak persistence of interest rates is driven by the underlying state variables that become less autocorrelated.

Keywords: Bond risk premia predictability; 2008 Financial crisis; Out-of-sample forecasts; Affine model (search for similar items in EconPapers)
JEL-codes: C53 G12 G17 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:109:y:2019:i:c:s0165188919301745

DOI: 10.1016/j.jedc.2019.103777

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