Predicting Bond Betas Using Macro-Finance Variables

Abstract

We predict bond betas conditioning on a number of macro-finance variables. We explore differences across long-term government bonds, investment grade corporate bonds, and high yield corporate bonds. We conduct out-of-sample forecasting using the new approach of combining predictor variables through Complete Subset Regressions (CSR). We consider the robustness of CSR forecasts across the 1-month, 3-month, and 12-month forecasting horizons. The CSR method performs well in predicting bond betas.

Keywords: bond betas; Complete Subset Regressions; corporate bonds; government bonds; macro-finance variables; Model Confidence Set

JEL Classification: C22; C53; C55; G12