Robust Bond Risk Premia

63 Pages Posted: 5 Jun 2017

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)

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Date Written: June 2017

Abstract

A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus.

Suggested Citation

Bauer, Michael and Hamilton, James D., Robust Bond Risk Premia (June 2017). NBER Working Paper No. w23480. Available at SSRN: https://ssrn.com/abstract=2980588

Michael Bauer (Contact Author)

Universit├Ąt Hamburg ( email )

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James D. Hamilton

University of California at San Diego ( email )

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