Predictive Systems, Real Economy, and Bond Risk Premia

43 Pages Posted: 23 Sep 2019 Last revised: 18 Dec 2019

See all articles by Runqing WAN

Runqing WAN

Capital University of Economics and Business - International School of Economics and Management

Date Written: December 31, 2018

Abstract

This paper investigates bond risk premia in the framework of predictive systems. Different from the traditional linear predictive models, predictive systems allow predictors to be imperfectly correlated with conditional expected returns, and could incorporate prior beliefs on the negative correlation between unexpected and expected returns. We find that predictive systems can deliver stronger evidence of predictability than linear predictive models. Furthermore, bond risk premia inferred by predictive systems are countercyclical and increase with inflation risk, and this is consistent with what consumption-based asset pricing models imply.

Keywords: Bond Risk Premia, Imperfect Predictors, Predictive Systems, Real Economy

JEL Classification: C11, G11, G12, G17

Suggested Citation

WAN, Runqing, Predictive Systems, Real Economy, and Bond Risk Premia (December 31, 2018). Available at SSRN: https://ssrn.com/abstract=3452405 or http://dx.doi.org/10.2139/ssrn.3452405

Runqing WAN (Contact Author)

Capital University of Economics and Business - International School of Economics and Management ( email )

Beijing
China

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