Bond returns and market expectations

Carlo Altavilla, Riccardo Costantini and Raffaella Giacomini ()

No CWP20/13, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: A well-documented empirical result is that market expectations extracted from futures contracts on the federal funds rate are among the best predictors for the future course of monetary policy. We show how this information can be exploited to produce accurate forecasts of bond excess returns and to construct profitable investment strategies in bond markets. We use a tilting method for incorporating market expectations into forecasts from a standard term-structure model and then derive the implied forecasts for bond excess returns. We find that the method delivers substantial improvements in out-of-sample accuracy relative to a number of benchmarks. The accuracy improvements are both statistically and economically significant and robust across a number of maturities and forecast horizons. The method would have allowed an investor to obtain positive cumulative excess returns from simple "riding the yield curve" investment strategies over the past ten years, and in this respect it would have outperformed its competitors even after accounting for a risk-return tradeoff.

Keywords: Yield curve modelling; futures; market timing; exponential tilting; Kullback-Leibler (search for similar items in EconPapers)
JEL-codes: C5 E4 G1 (search for similar items in EconPapers)
Date: 2013-05-24
New Economics Papers: this item is included in nep-fmk and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.cemmap.ac.uk/wps/cwp201313.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Bond Returns and Market Expectations (2014)
Working Paper: Bond returns and market expectations (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ifs:cemmap:20/13

Ordering information: This working paper can be ordered from
The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE

Access Statistics for this paper

More papers in CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies The Institute for Fiscal Studies 7 Ridgmount Street LONDON WC1E 7AE. Contact information at EDIRC.
Bibliographic data for series maintained by Emma Hyman ().