What 200 years of data tell us about the predictive variance of long-term bonds

Pasquale Della Corte, Can Gao, Daniel P. A. Preve and Giorgio Valente

No 460, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper investigates the long-horizon predictive variance of an international bond strategy where a U.S. investor holds unhedged positions in constant-maturity long-term foreign bonds funded at domestic short-term interest rates. Using over two centuries of data from major economies, the study finds that predictive variance grows with the investment horizon, driven primarily by uncertainties in interest rate differentials and exchange rate returns, which outweigh mean reversion effects. The analysis, incorporating both observable and unobservable predictors, highlights that unobservable predictors linked to shifts in monetary and exchange rate regimes are the dominant source of long-term risk, offering fresh insights into international bond investment strategies.

Keywords: Currency risk; Long-term bonds; Predictability; Long-term investments (search for similar items in EconPapers)
JEL-codes: F31 G12 G15 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-fmk, nep-for, nep-his and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:331899

DOI: 10.2139/ssrn.5734512

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