Forecasting Corporate Bond Returns: An Iterated Combination Approach
33 Pages Posted: 28 Oct 2013 Last revised: 23 Jun 2016
Date Written: June 21, 2016
Using a comprehensive data set and an array of 27 macroeconomic, stock and bond predictors, we find that corporate bond returns are highly predictable based on an iterated combination model. The large set of predictors outperforms traditional predictors substantially, and predictability generated by the model is both statistically and economically significant. Stock market and macroeconomic variables play an important role in forming expected bond returns. Return forecasts are closely linked to the evolution of real economy. Corporate bond premia have strong predictive power for business cycle and the primary source of this predictive power is from the low-grade bond premium.
Keywords: Predictability; corporate bonds; out-of-sample forecasts; utility gains
JEL Classification: G12; G14
Suggested Citation: Suggested Citation