Do economic variables improve bond return volatility forecasts?

Shih-Wei Chao

International Review of Economics & Finance, 2016, vol. 46, issue C, 10-26

Abstract: This paper explores whether various economic variables improve monthly bond return volatility forecasts using the 1963–2012 data. In-sample analysis indicates that stock return or Federal Funds rate difference Granger causes bond volatility of all maturities. The forecasting ability of other variables mainly appears at the short end of the term structure or during the relatively turbulent time. Out-of-sample analysis suggests little evidence of forecast improvement, though forecast combination does improve the performance. Decomposing the out-of-sample forecasts indicates that the poor performance is primarily attributed to overfitting, and variable reduction by principal components does not change the results.

Keywords: Bond return volatility; Predictive ability; Forecast combination; Forecast performance decomposition (search for similar items in EconPapers)
JEL-codes: C22 G12 G17 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:46:y:2016:i:c:p:10-26

DOI: 10.1016/j.iref.2016.08.001

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