Revisiting the Predictability of Bond Risk Premia

36 Pages Posted: 18 Mar 2009

See all articles by Daniel L. Thornton

Daniel L. Thornton

Federal Reserve Bank of St. Louis - Research Division

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Date Written: March 17, 2009

Abstract

This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. After a simple reparametrization of models used to predict spot rates or excess returns, we find that forward rates exhibit much less predictive power than previously recorded. Furthermore, our economic value analysis indicates that there are no economic gains to mean-variance investors who use the predictions of these models in a stylized dynamic asset allocation strategy.

Keywords: bond prices, bond risk premia, predictability

JEL Classification: G0, G1, E0, E4

Suggested Citation

Thornton, Daniel L. and Valente, Giorgio, Revisiting the Predictability of Bond Risk Premia (March 17, 2009). Available at SSRN: https://ssrn.com/abstract=1362008 or http://dx.doi.org/10.2139/ssrn.1362008

Daniel L. Thornton (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8582 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://research.stlouisfed.org/econ/thornton/

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

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