Conditional Risk Premia in International Government Bond Markets
20 Pages Posted: 26 Jun 2015
Date Written: June 25, 2015
The paper estimates conditional pricing models for 11 international government bonds and shows that, while local instruments capture the change in the bonds’ risks, global instruments model the variation in the factor risk premia. Altogether the changes in the factor risk premium capture 78.25% of the bonds’ predictability, while the dynamics in the betas account for less than 1%. One cannot conclude however that the conditional models are well-specified as parameter instability and relatively large mean squared errors were uncovered. These results extend for the first time some of the evidence from the equity market of Ferson and Harvey (1993), Harvey (1995) and Ghysels (1998) to the bond market.
Keywords: international government bonds; conditional asset pricing models; variance ratio; mean squared errors; parameter stability
JEL Classification: G12, G15
Suggested Citation: Suggested Citation