Expected Business Conditions and Bond Risk Premia
55 Pages Posted: 13 Sep 2014 Last revised: 3 Mar 2018
Date Written: September 24, 2015
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: Suggested Citation