Time-Varying Risk Aversion and the Predictability of Bond Premia

Oguzhan Cepni, Riza Demirer, Rangan Gupta and Christian Pierdzioch

No 201906, Working Papers from University of Pretoria, Department of Economics

Abstract: 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
Date: 2019-01
New Economics Papers: this item is included in nep-fmk, nep-for and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Journal Article: Time-varying risk aversion and the predictability of bond premia (2020)
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