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Bond Return Predictability: Economic Value and Links to the Macroeconomy

Gargano, Antonio ; Pettenuzzo, Davide ; Timmermann, Allan

Management science, 2019-02, Vol.65 (2), p.508-540 [Periódico revisado por pares]

Linthicum: INFORMS

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Título:
Bond Return Predictability: Economic Value and Links to the Macroeconomy
Autor: Gargano, Antonio ; Pettenuzzo, Davide ; Timmermann, Allan
Assuntos: Accounting ; Analysis ; bond returns ; Bonds ; Economic aspects ; Economic value added ; Forecasts and trends ; macro factors ; Macroeconomics ; Management science ; Risk adjustment ; stochastic volatility ; time-varying parameters ; Treasury securities ; Uncertainty ; unspanned macro risk factors ; yield curve
É parte de: Management science, 2019-02, Vol.65 (2), p.508-540
Descrição: Studies of bond return predictability find a puzzling disparity between strong statistical evidence of return predictability and the failure to convert return forecasts into economic gains. We show that resolving this puzzle requires accounting for important features of bond return models such as volatility dynamics and unspanned macro factors. A three-factor model comprising a forward spread, a weighted combination of forward rates, and a macro factor generates notable gains in out-of-sample forecast accuracy compared with a model based on the expectations hypothesis. Such gains in predictive accuracy translate into higher risk-adjusted portfolio returns after accounting for estimation error and model uncertainty. Consistent with models featuring unspanned macro factors, our forecasts of future bond excess returns are strongly negatively correlated with survey forecasts of short rates. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2829 This paper was accepted by Gustavo Manso, finance.
Editor: Linthicum: INFORMS
Idioma: Inglês

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Bond Return Predictability: Economic Value and Links to the Macroeconomy

Gargano, Antonio ; Pettenuzzo, Davide ; Timmermann, Allan

Linthicum: INFORMS

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