Download or read book Bond Risk Premia written by John Howland Cochrane and published by . This book was released on 2002 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies time variation in expected excess bond returns. We run regressions of annual excess returns on forward rates. We find that a single factor predicts 1-year excess returns on 1-5 year maturity bonds with an R2 up to 43%. The single factor is a tent-shaped linear function of forward rates. The return forecasting factor has a clear business cycle correlation: Expected returns are high in bad times, and low in good times, and the return-forecasting factor forecasts long-run output growth. The return-forecasting factor also forecasts stock returns, suggesting a common time-varying premium for real interest rate risk. The return forecasting factor is poorly related to level, slope, and curvature movements in bond yields. Therefore, it represents a source of yield curve movement not captured by most term structure models. Though the return-forecasting factor accounts for more than 99% of the time-variation in expected excess bond returns, we find additional, very small factors that forecast equally small differences between long term bond returns, and hence statistically reject a one-factor model for expected returns

Download or read book Empirical Dynamic Asset Pricing written by Kenneth J. Singleton and published by Princeton University Press. This book was released on 2009-12-13 with total page 497 pages. Available in PDF, EPUB and Kindle. Book excerpt: Written by one of the leading experts in the field, this book focuses on the interplay between model specification, data collection, and econometric testing of dynamic asset pricing models. The first several chapters provide an in-depth treatment of the econometric methods used in analyzing financial time-series models. The remainder explores the goodness-of-fit of preference-based and no-arbitrage models of equity returns and the term structure of interest rates; equity and fixed-income derivatives prices; and the prices of defaultable securities. Singleton addresses the restrictions on the joint distributions of asset returns and other economic variables implied by dynamic asset pricing models, as well as the interplay between model formulation and the choice of econometric estimation strategy. For each pricing problem, he provides a comprehensive overview of the empirical evidence on goodness-of-fit, with tables and graphs that facilitate critical assessment of the current state of the relevant literatures. As an added feature, Singleton includes throughout the book interesting tidbits of new research. These range from empirical results (not reported elsewhere, or updated from Singleton's previous papers) to new observations about model specification and new econometric methods for testing models. Clear and comprehensive, the book will appeal to researchers at financial institutions as well as advanced students of economics and finance, mathematics, and science.

Download or read book Bond Risk Premia written by Harald Tolleshaug and published by . This book was released on 2009 with total page 109 pages. Available in PDF, EPUB and Kindle. Book excerpt: Forecasting the expected returns on bonds with increasing certainty is wanted from all rational investors in the fixed income markets. The potential for higher returns increase with the ability to forecast expected returns, through better trading payoffs and improved hedging and risk management. The expectations hypothesis was long prevailing in the academical litterature. It stated that the rational investor was expected to require zero or at least a constant excess return on bonds with long maturity over short maturity. This is equal to no time varying risk premiums. It is however reasonable for the rational investor to have time varying risk preferences based on the economic situation and outlook for the future, as described by Cochrane (1999). Thus, bonds with different maturity may be priced with different risk in an efficient market, and accordingly have time varying risk premiums. The expectations hypothesis has thus been rejected. This has been manifested through the classical studies of Fama and Bliss (1987) as well as Campbell and Shiller (1991). These studies modelled predictions of bond returns on specific maturities, with a R2 up to 18%. In a new and original approach, Cochrane and Piazzesi (2005) models a single-factor that predicts bond returns of any maturity, with a R2 up to 44%, more than doubled from the studies mentioned above. This is done on the same dataset as Fama and Bliss (1987) used and would be a big discovery within the field, if the model can be accepted across time and datasets. I test the model of Cochrane and Piazzesi (2005) based on the framework that these used originally, as well as new tests they have provided as response to critique of the model. So far, no other paper has rejected this model on all these dimensions. I use very well accepted data, and reject the model in every dimension tested. This paper is thus the rejection of the Cochrane and Piazzesi (2005) single-factor bond forecasting model.

Download or read book Bond Risk Premia and Realized Jump Volatility written by Jonathan H. Wright and published by . This book was released on 2007 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Corporate Bond Risk Premia written by Christian Speck and published by . This book was released on 2013 with total page 63 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the holding period risk premia of U.S. corporate and Treasury bonds. Using excess return regressions, two priced risk factors are derived from yield and macroeconomic data: a priced term risk factor and a priced credit risk factor explain half of the variation in one-year corporate and Treasury excess returns. The information of the term risk factor is not represented by major yield characteristics but is a hidden risk factor whereas the credit risk factor is not hidden. The term risk premium is earned primarily for exposure to inflation and the yield level and the credit risk premium is earned for an exposure to real growth and the credit spread level. The regression results are usefull for the specification of the market prices of risk in affine credit term structure models: The two-factor representation of the risk premium suggests a rank restriction on the market prices of risk and an additional pricing factor to capture the hidden property of term risk.

Download or read book Robust Bond Risk Premia written by Michael D. Bauer and published by . This book was released on 2017 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus.

Download or read book Robust Bond Risk Premia written by Michael Bauer and published by . This book was released on 2015 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: A consensus has recently emerged that a number of variables in addition to the level, slope, and curvature of the term structure can help predict interest rates and excess bond returns. We demonstrate that the statistical tests that have been used to support this conclusion are subject to very large size distortions from a previously unrecognized problem arising from highly persistent regressors and correlation between the true predictors and lags of the dependent variable. We revisit the evidence using tests that are robust to this problem and conclude that the current consensus is wrong. Only the level and the slope of the yield curve are robust predictors of excess bond returns, and there is no robust and convincing evidence for unspanned macro risk.

Download or read book Macro Factors in Bond Risk Premia written by Sydney C. Ludvigson and published by . This book was released on 2005 with total page 22 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical evidence suggests that excess bond returns are forecastable by financial indicators such as forward spreads and yield spreads, a violation of the expectations hypothesis based on constant risk premia. But existing evidence does not tie the forecastable variation in excess bond returns to underlying macroeconomic fundamentals, as would be expected if the forecastability were attributable to time variation in risk premia. We use the methodology of dynamic factor analysis for large datasets to investigate possible empirical linkages between forecastable variation in excess bond returns and macroeconomic fundamentals. We find that several common factors estimated from a large dataset on U.S. economic activity have important forecasting power for future excess returns on U.S. government bonds. Following Cochrane and Piazzesi (2005), we also construct single predictor state variables by forming linear combinations of either five or six estimated common factors. The single state variables forecast excess bond returns at maturities from two to five years, and do so virtually as well as an unrestricted regression model that includes each common factor as a separate predictor variable. The linear combinations we form are driven by both "real" and "inflation" macro factors, in addition to financial factors, and contain important information about one year ahead excess bond returns that is not captured by forward spreads, yield spreads, or the principal components of the yield covariance matrix.

Download or read book Fiscal Policy Driven Bond Risk Premia written by Lorenzo Bretscher and published by . This book was released on 2019 with total page 100 pages. Available in PDF, EPUB and Kindle. Book excerpt: Fiscal policy matters for bond risk premia. Empirically, government spending level and volatility predict excess bond returns. Shocks to government spending level and volatility are also priced in the cross-section of bond and stock portfolios. Theoretically, level shocks raise inflation when marginal utility is high, thus generating positive inflation risk premia (term structure level effect). Volatility shocks steepen the yield curve (slope effect), producing positive term premia. These effects are consistent with evidence from a structural VAR. Further, asset pricing tests using model simulated data corroborate our empirical findings. Lastly, fiscal shocks are amplified at the zero lower bound.

Download or read book Expected Business Conditions and Bond Risk Premia written by Jonas Eriksen and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Predictability of Bond Risk Premia with an Affine Term Structure Model written by Sibel Korkmaz and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book International Bond Risk Premia written by Magnus Dahlquist and published by . This book was released on 2015 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The endeavor to understand bond returns and the term structure of interest rates has generated an extensive literature, ranging from papers on return predictability and affine term structure models to theoretical contributions in the form of equilibrium models. While most of the empirical literature focuses on US data, a large body of work applies an international perspective. This chapter reviews the relevant literature while also providing empirical evidence on international bond risk premia and the link to the macroeconomy.

Download or read book A Beta Based Framework for lower Bond Risk Premia written by Stefano Nobili and published by . This book was released on 2008 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Time Series and Cross Section Variation of Bond Risk Premia written by Niloofar Sahebalzamany and published by . This book was released on 2018 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Revisiting the Predictability of Bond Risk Premia written by Daniel L. Thornton and published by . This book was released on 2009 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. After a simple reparametrization of models used to predict spot rates or excess returns, we find that forward rates exhibit much less predictive power than previously recorded. Furthermore, our economic value analysis indicates that there are no economic gains to mean-variance investors who use the predictions of these models in a stylized dynamic asset allocation strategy.

Download or read book Analysis of Bond Risk Premia written by Lukas Wäger and published by . This book was released on 2012 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The focus of this thesis is on bond return predictability and providing an empirical and economic understanding of bond risk premia. The thesis consists of an empirical analysis of time-varying bond risk premia along three major branches of the current term structure literature, namely yields-only, macro-finance and multi-currency term structure models. All these models belong to the well-known class of affine models introduced by Ang and Piazzesi (2003), whereas the latter two embed unspanned factors. Unspanned factors are state variables that have an effect on bond risk premia but do not span the cross-section of yields, as recently introduced by Duffee (2011), Joslin, Priebsch and Singleton (2011) and Boos (2011). The section concerning yields-only models contributes by providing evidence of three priced risk premia of bonds in the US market, extending the analysis of Cochrane and Piazzesi (2005) and Boos (2011). The section concerning macrofinance models adds to the new branch of models with unspanned macro factors and extends existing research by analyzing the effects of unspanned macro factors on risk premia beyond the level risk premium and extending into a broader and longer data set of macroeconomic variables. The section concerning multi-currency models firstly introduces unspanned factors into international models by taking mutually unspanned latent yield curve factors of domestic and foreign countries as state variables. The information in foreign yield curves is found to be partly unspanned by the domestic yield curve and improves bond return predictability beyond local models.

Download or read book A factor analysis of bond risk premia written by Sydney C. Ludvigson and published by . This book was released on 2009 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses the factor augmented regression framework to analyze the relation between bond excess returns and the macro economy. Using a panel of 131 monthly macroeconomic time series for the sample 1964:1-2007:12, we estimate 8 static factors by the method of asymptotic principal components. We also use Gibb sampling to estimate dynamic factors from the 131 series reorganized into 8 blocks. Regardless of how the factors are estimated, macroeconomic factors are found to have statistically significant predictive power for excess bond returns. We show how a bias correction to the parameter estimates of factor augmented regressions can be obtained. This bias is numerically trivial in our application. The predictive power of real activity for excess bond returns is robust even after accounting for finite sample inference problems. Forecasts of excess bond returns (or bond risk premia) are countercyclical. This implies that investors are compensated for risks associated with recessions.