Predicting Bond Return Predictability

117 Pages Posted: 30 Jan 2020 Last revised: 25 Aug 2021

Date Written: August 25, 2021

Abstract

This paper provides empirical evidence on predictable time variations in out-of- sample bond return predictability. Bond return predictability is associated with periods of high (low) economic activity (uncertainty), which implies that violations of the expectations hypothesis are state-dependent and linked to features of the business cycle. These state-dependencies in predictability, established by introducing a new multivariate test for equal conditional predictive ability, can be used in real-time to improve out-of-sample bond risk premia estimates and investors’ economic utility through a novel dynamic forecast combination scheme that uses predicted forecasting performance to identify the best set of methods to include in the combined forecast. Dynamically combined forecasts exhibit strong countercyclical behavior and peak during recessions.

Keywords: bond excess returns, forecasting, state-dependencies, multivariate test, equal conditional predictive ability

JEL Classification: C12, C52, E43, E44, G12

Suggested Citation

Borup, Daniel and Eriksen, Jonas Nygaard and Kjær, Mads Markvart and Thyrsgaard, Martin, Predicting Bond Return Predictability (August 25, 2021). Available at SSRN: https://ssrn.com/abstract=3513340 or http://dx.doi.org/10.2139/ssrn.3513340

Daniel Borup

Aarhus University, CREATES, DFI ( email )

School of Business and Social Sciences
Fuglesangs Alle 4
Aarhus V, 8210
Denmark

Jonas Nygaard Eriksen (Contact Author)

Aarhus University, CREATES, DFI ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark

Mads Markvart Kjær

Aarhus University, CREATES ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Martin Thyrsgaard

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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