Harvesting the Term Premium: International Out-of-Sample Evidence

Abstract

The existing evidence for predictability of international bond risk premia raises questions about whether significant statistical in-sample results can be translated into economic gains. Moreover, existing findings offer limited information on their practical applicability. This study examines a broad set of existing bond risk premia models, extends it to international markets, and highlights the benefits of using a forecasting approach that utilizes information from the cross-section of countries. Such an approach, combining information from multiple international markets, better captures drivers in international bond risk premia than other approaches, including solely local information. The out-of-sample findings illustrate how government bond investors can use the presented approach to enhance their efficient frontier, though for most models the overall economic gains remain limited.

Keywords: bond risk premia, global forecasting, out-of-sample findings