Predicting Bond Return Predictability

Daniel Borup, Jonas Nygaard Eriksen, Mads M. Kjær () and Martin Thyrsgaard ()
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Mads M. Kjær: Department of Economics and Business Economics, Aarhus University, 8210 Aarhus V, Denmark; Danish Finance Institute, 2000 Frederiksberg, Denmark
Martin Thyrsgaard: InCommodities A/S, 8200 Aarhus N, Denmark

Management Science, 2024, vol. 70, issue 2, 931-951

Abstract: This paper provides empirical evidence on predictable time variations in out-of-sample bond return predictability. Bond return predictability is associated with periods of high (low) economic activity (uncertainty), which implies that violations of the expectations hypothesis are state dependent and linked to features of the business cycle. These state dependencies in predictability, established by introducing a new multivariate test for equal conditional predictive ability, can be used in real time to improve out-of-sample bond risk premia estimates and investors’ economic utility through a novel dynamic forecast combination scheme that uses predicted forecasting performance to identify the best set of methods to include in the combined forecast. Dynamically combined forecasts exhibit strong countercyclical behavior and peak during recessions.

Keywords: bond excess returns; forecast combination; state dependencies; multivariate test; equal conditional predictive ability (search for similar items in EconPapers)
Date: 2024
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http://dx.doi.org/10.1287/mnsc.2023.4713 (application/pdf)

Related works:
Working Paper: Predicting bond return predictability (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:2:p:931-951

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