Predicting Bond Return Predictability

108 Pages Posted: 30 Jan 2020 Last revised: 13 Apr 2020

Date Written: April 12, 2020


We document predictable shifts in bond return predictability using a new test for equal conditional predictive ability among multiple forecasting methods. Bond returns are predictable in high (low) economic activity (uncertainty) states, implying that the expectations hypothesis of the term structure holds periodically. These predictable performance differences can be used in real-time to improve out-of-sample bond risk premia estimates and investors’ economic value by means of a novel and dynamic forecast combination scheme. Consistent with standard financial theory, the resulting forecast are strongly countercyclical and peaks in recessions. The empirical findings can be recovered in a non-linear term structure model.

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 (April 12, 2020). Available at SSRN: or

Daniel Borup

Aarhus University, CREATES, DFI ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C

Jonas Nygaard Eriksen (Contact Author)

Aarhus University, CREATES, DFI ( email )

Fuglesangs Alle 4
Aarhus V, 8210

Mads Markvart Kjær

Aarhus University, CREATES ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000

Martin Thyrsgaard

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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