Are the New-Generation Treasury Return-Predictive Factors Economically Significant? A Cross-Currency and Out-of-Sample Investigation

41 Pages Posted: 31 Mar 2019

Date Written: March 6, 2019

Abstract

Recent studies claim that a new generation of return-predicting factors can predict excess returns in the US Treasury market far better than the slope-related factors. The new-generation factors are, however, often difficult to interpret and far less parsimonious, and therefore doubts have been raised about their robustness, and about whether their high predicting power may be an artifact of data mining and overfitting. By predicting excess returns in one currency using return-predicting factors estimated from a different currency, we present strong evidence suggesting that these new factors are statistically informative, economically meaningful and, at least in their `restricted' form, surprisingly robust. A new out-of-sample technique for same-currency returns that we introduce reinforces these conclusions. Our findings also point to a commonality of fundamental financial mechanism(s) at the origin of the predictability observed in all the Treasury markets examined.

Keywords: excess returns, return-predicting factors, yield forecasting

JEL Classification: G12, G15

Suggested Citation

Rebonato, Riccardo, Are the New-Generation Treasury Return-Predictive Factors Economically Significant? A Cross-Currency and Out-of-Sample Investigation (March 6, 2019). Available at SSRN: https://ssrn.com/abstract=3348058 or http://dx.doi.org/10.2139/ssrn.3348058

Riccardo Rebonato (Contact Author)

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
54
Abstract Views
308
rank
404,782
PlumX Metrics