Expected Business Conditions and Bond Risk Premia

55 Pages Posted: 13 Sep 2014 Last revised: 3 Mar 2018

Date Written: September 24, 2015

Abstract

This paper studies the predictability of bond risk premia by means of expectations to future business conditions using survey forecasts from the Survey of Professional Forecasters. We show that expected business conditions consistently affect excess bond returns and that the inclusion of expected business conditions in standard predictive regressions improve forecast performance relative to models using information derived from the current term structure or macroeconomic variables. The results are confirmed in a real-time out-of-sample exercise, where the predictive accuracy of the models is evaluated both statistically and from the perspective of a mean-variance investor that trades in the bond market.

Keywords: Bond risk premia, macro-expectations, predictability, economic value, expectations hypothesis, time-varying risk premia

JEL Classification: E43, E44, E47, G11, G12

Suggested Citation

Eriksen, Jonas Nygaard, Expected Business Conditions and Bond Risk Premia (September 24, 2015). Journal of Financial and Quantitative Analysis (JFQA), Vol. 52, No. 4, Aug. 2007, pp. 1667-1703, Available at SSRN: https://ssrn.com/abstract=2494765 or http://dx.doi.org/10.2139/ssrn.2494765

Jonas Nygaard Eriksen (Contact Author)

Aarhus University, CREATES, DFI ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark

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