Bond Return Predictability: Economic Value and Links to the Macroeconomy

Davide Pettenuzzo (), Antonio Gargano and Allan Timmermann
Additional contact information
Antonio Gargano: University of Melbourne
Allan Timmermann: University of California San Diego

No 75, Working Papers from Brandeis University, Department of Economics and International Business School

Abstract: Studies of bond return predictability ?nd a puzzling disparity between strong statistical evidence of return predictability and the failure to convert return forecasts into economic gains. We show that resolving this puzzle requires accounting for important features of bond return models such as time varying parameters and volatility dynamics. A three-factor model comprising the Fama and Bliss (1987) forward spread, the Cochrane and Piazzesi (2005) com- bination of forward rates and the Ludvigson and Ng (2009) macro factor generates notable gains in out-of-sample forecast accuracy compared with a model based on the expectations hypothesis. Importantly, we ?nd that such gains in predictive accuracy translate into higher risk-adjusted portfolio returns after accounting for estimation error and model uncertainty, as evidenced by the performance of model combinations. Finally, we ?nd that bond excess returns are predicted to be signi?cantly higher during periods with high in?ation uncertainty and low economic growth and that the degree of predictability rises during recessions.

JEL-codes: G11 G12 G17 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2014-07
New Economics Papers: this item is included in nep-for and nep-ger
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.brandeis.edu/economics/RePEc/brd/doc/Brandeis_WP75.pdf First version, 2014 (application/pdf)

Related works:
Journal Article: Bond Return Predictability: Economic Value and Links to the Macroeconomy (2019)
Working Paper: Bond Return Predictability: Economic Value and Links to the Macroeconomy (2016)
Working Paper: Bond Return Predictability: Economic Value and Links to the Macroeconomy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:brd:wpaper:75

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