Time-Varying Risk Aversion and the Predictability of Bond Premia
Oguzhan Cepni (),
Rangan Gupta and
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Oguzhan Cepni: Central Bank of the Republic of Turkey, Anafartalar Mah. Istiklal Cad. No:10 06050, Ankara, Turkey
No 201906, Working Papers from University of Pretoria, Department of Economics
We show that time-varying risk aversion captures significant predictive information over excess returns on U.S. government bonds even after controlling for a large number of financial and macro factors. Including risk aversion improves the predictive accuracy at all horizons (one- to twelve-months ahead) for shorter maturity bonds and at shorter forecast horizons (one- to three-months ahead) for longer maturity bonds. Given the role of Treasury securities in economic forecasting models and portfolio allocation decisions, our findings have significant implications for investors, policy makers and researchers interested in accurately forecasting return dynamics for these assets.
Keywords: Bond premia; Predictability; Risk aversion; Out-of-sample forecasts (search for similar items in EconPapers)
JEL-codes: C22 C53 G12 G17 (search for similar items in EconPapers)
Pages: 13 pages
New Economics Papers: this item is included in nep-fmk, nep-for and nep-upt
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Journal Article: Time-varying risk aversion and the predictability of bond premia (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201906
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