Robust Bond Risk Premia

59 Pages Posted: 6 Nov 2015

See all articles by Michael Bauer

Michael Bauer

Universit├Ąt Hamburg

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: October 12, 2015

Abstract

A consensus has recently emerged that a number of variables in addition to the level, slope, and curvature of the term structure can help predict interest rates and excess bond returns. We demonstrate that the statistical tests that have been used to support this conclusion are subject to very large size distortions from a previously unrecognized problem arising from highly persistent regressors and correlation between the true predictors and lags of the dependent variable. We revisit the evidence using tests that are robust to this problem and conclude that the current consensus is wrong. Only the level and the slope of the yield curve are robust predictors of excess bond returns, and there is no robust and convincing evidence for unspanned macro risk.

Keywords: yield curve, spanning, bond returns, small-sample bias, robust inference

JEL Classification: E430, E440, E470

Suggested Citation

Bauer, Michael and Hamilton, James D., Robust Bond Risk Premia (October 12, 2015). CESifo Working Paper Series No. 5541. Available at SSRN: https://ssrn.com/abstract=2686125

Michael Bauer (Contact Author)

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James D. Hamilton

University of California at San Diego ( email )

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National Bureau of Economic Research (NBER)

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