Are Bond Returns Predictable with Real-Time Macro Data?
76 Pages Posted: 23 Jan 2018 Last revised: 22 Oct 2021
Date Written: April 30, 2020
We examine whether bond returns are predicted by real-time macro variables with possible nonlinear predictive relationship and possible presence of weak factors. We propose a scaled sufficient forecasting method to deal with the issues arising from these two features, and study its asymptotic properties. Applying both existing and our new methods, we find that real-time macro variables have significant in- and out-of-sample forecasting power, generate sizeable economic values, and their predictability is not spanned by the yield curve.
We also find that the forecasted bond returns are countercycilcal and the magnitude of predictability is stronger in economic recessions, thereby lending empirical support to well-known macro finance theories.
Keywords: Bond Return Predictability, Real Time Macro Data, Vintage, PCA, Big Data, Machine Learning
JEL Classification: C22, C53, G11, G12, G17
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