 Instantaneous volatility of the yield curve, variance risk premium and bond return predictabilityXiming Yin and Ge Yang Journal of Empirical Finance, 2024, vol. 77, issue C Abstract: This paper proposes a new way of estimating the instantaneous volatility of fixed income securities using derivatives data, which can further be used to construct the corresponding yield curve variance risk premium (VRP). We show that this VRP measure exhibits strong long-horizon predictive power for bond excess returns. After controlling for the shape of the yield curve, the VRP strongly predicts 1-year holding period excess returns for 2-year to 10-year zero coupon bonds. The marginal R2 of VRP is as high as 12.6%. One standard deviation increase in the VRP is associated with 2.224% increase in the bond excess return. This result is robust when we include various other bond return predictors, such as the Cochrane–Piazzesi “tent-shaped” factor. The out-of-sample analysis suggests that this predictability is not only statistically significant, but also can be translated into economic gains. Additional tests suggest that this predictability varies with economic conditions. Keywords: Random field; Term structure; Instantaneous volatility; Variance risk premium; Bond return (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:77:y:2024:i:c:s0927539824000252 DOI: 10.1016/j.jempfin.2024.101490 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.