Download or read book Out of Sample Predictability of Bond Returns written by Luiz Paulo Fichtner and published by . This book was released on 2013 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: We test the out-of-sample predictive power for one-year bond excess returns for a variety of models that have been proposed in the literature. We find that these models perform well in sample, but have worse out-of-sample performance than the historical sample mean. We write the one-year excess return on a n-maturity bond at time t + 1 as the difference between n times the n-maturity bond yield at time t, and the sum of n - 1 times the (n - 1)-maturity bond yield at time t + 1 and the one-year bond yield at time t. Instead of forecasting returns directly, we forecast bond yields and replace them in the bond ex- cess return definition. We use two bond yield forecasting methods: a random walk and a dynamic Nelson-Siegel approach proposed by Diebold and Li (2006). An investor who used a simple random walk on yields would have predicted bond excess returns with out-of-sample R-squares of up to 15%, while a dynamic Nelson-Siegel approach would have produced out-of-sample R-squares of up to 30%.

Download or read book Out of sample Predictions of Bond Excess Returns and Forward Rates written by Daniel L. Thornton and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Real Time Forecasting of U S Bond Yields and Their Excess Returns written by Joseph H. Davis and published by . This book was released on 2008 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: Some bond investors form expectations for future interest rates by either assuming that yields will not change over time (i.e. random walk), or that future spot rates will evolve to match current forward rates (i.e., the expectations hypothesis). Recent academic research argues that we can do significantly better by modeling term structure dynamics as some time-varying function of current spot and forward rates. Using a new Federal Reserve Board dataset, we examine the out-of-sample forecasting ability of these and other dynamic models for U.S. Treasury bonds and their excess returns. Broadly speaking, we find that none of these models has consistently and statistically outperformed a random walk across bond maturities since 1985. We reconcile our findings with those that claim stronger predictability by tracing the deterioration in out-of-sample forecasts to changes in the U.S. inflation process. From this, we specify simple yield dynamics that out-forecast a random walk in real time. We discuss avenues for future research.

Download or read book Macrofinance Model of the Czech Economy written by International Monetary Fund and published by International Monetary Fund. This book was released on 2012-03-01 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper developes a VAR macrofinance model of the Czech economy. It shows that yield misalignments from the yields implied by the macrofinance model partially determine subsequent yield changes over three to nine months. These yield misalignments tend to persist for a number of months. This persistence of the misalignments was explained by (a) the fact that the macro-economy influences asset markets only at lower frequencies, (b) the liquidity effect particularly during the times of capital inflows to Czech Republic, and (c) the fact that not all misalignments were greater than their historical one standard deviation.

Download or read book Forecasting Through the Rear View Mirror written by Eric Ghysels and published by . This book was released on 2014 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: Macroeconomic data are typically subject to future revisions and released with delay. Predictive return regressions using such data therefore potentially overstate the information set available to investors in real time. We document that data revisions account for a sizable share of in-sample and out-of-sample predictive power for Treasury returns found in macroeconomic data. This is partly explained by the fact that information contained in revisions to prior months' releases is incorporated into bond prices. Survey forecasts available in real time contain information about future revised data that is orthogonal to the real-time data and also helps to predict bond returns.

Download or read book Bond Return Predictability written by Antonio Gargano and published by . This book was released on 2014 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 time varying parameters and volatility dynamics. A three-factor model comprising the Fama-Bliss (1987) forward spread, the Cochrane-Piazzesi (2005) combination of forward rates and the Ludvigson-Ng (2009) macro factor generates notable gains in out-of-sample forecast accuracy compared with a model based on the expectations hypothesis. Importantly, we find that such gains in predictive accuracy translate into higher risk-adjusted portfolio returns after accounting for estimation error and model uncertainty, as evidenced by the performance of model combinations. Finally, we find that bond excess returns are predicted to be significantly higher during periods with high inflation uncertainty and low economic growth and that the degree of predictability rises during recessions.

Download or read book Bond Return Predictability written by Antonio Gargano and published by . This book was released on 2017 with total page 68 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 time varying parameters, volatility dynamics, and unspanned macro factors. A three-factor model comprising the Fama and Bliss (1987) forward spread, the Cochrane and Piazzesi (2005) combination of forward rates and the Ludvigson and Ng (2009) 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, as evidenced by the performance of forecast combinations. Consistent with models featuring unspanned macro factors, our forecasts of future bond excess returns are strongly negatively correlated with survey forecasts of short rates.

Download or read book Iterated Combination Forecast and Treasury Bond Predictability written by Hai Lin and published by . This book was released on 2018 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a large number of predictors and based on an extended iterated combination approach of Lin, Wu, and Zhou (2017), we document both statistical and economic significance of Treasury bond return predictability. Macroeconomic and aggregate liquidity variables contain predictive information for bond returns and combining them with term structure and Ludvigson-Ng macro factors significantly improve out-of-sample forecast gains. We also find that variance forecasts can be substantially improved with our approach, yielding significant gains in asset allocation decision. Our results show that information from a large number of predictors collectively contributes to the time-varying Treasury bond premia, and this is robust to different return measures, horizons and sample periods.

Download or read book The Predictability of International Asset Returns written by Bruno H. Solnik and published by . This book was released on 1991 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Real Time Bayesian Learning and Bond Return Predictability written by Andras Fulop and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper examines statistical and economic evidence of out-of-sample bond return predictability for a real-time Bayesian investor who learns about parameters, hidden states, and predictive models over time. We find some statistical evidence using information contained in forward rates. However, such statistical predictability can hardly generate any economic value for investors. Furthermore, we find that strong statistical and economic evidence of bond return predictability from fully-revised macroeconomic data vanishes when real-time macroeconomic information is used. We also show that highly levered investments in bonds can improve short-run bond return predictability.

Download or read book Bond Risk Premia and Realized Jump Risk written by Jonathan H. Wright and published by . This book was released on 2009 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: We find that augmenting a regression of excess bond returns on the term structure of forward rates with an estimate of the mean realized jump size almost doubles the R2 of the forecasting regression. The return predictability from augmenting with the jump mean easily dominates that offered by augmenting with options-implied volatility and realized volatility from high frequency data. In out-of-sample forecasting exercises, inclusion of the jump mean can reduce the root mean square prediction error by up to 40 percent. The incremental return predictability captured by the realized jump mean largely accounts for the countercyclical movements in bond risk premia. This result is consistent with the setting of an incomplete market in which the conditional distribution of excess bond returns is affected by a jump risk factor that does not lie in the span of the term structure of yields.

Download or read book Bond Return Predictability written by Florinda Silva and published by . This book was released on 2008 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: The predictability of security returns has received considerable attention in the finance literature. Notwithstanding, the predictability of bond returns, in particular outside the US, has been far less explored. In this paper we analyse the ability of several predetermined information variables in predicting bond returns in the European market. We test if variables, commonly used for that matter in the context of other markets (such as inverse relative wealth, term spread, real bond yield and a January dummy) are also useful predictors of European bond returns. Due to some particularities of the sample period of analysis, characterised by the EMU convergence, we also make another contribution by including the yield spread in relation to German bonds. Furthermore, we analyse the return predictability across different bond maturities: 1-3, 3-5 and 5 or more years to maturity.The results indicate that variables like the term spread, IRW and a January dummy represent useful information in order to predict bond returns for different maturities. The other two variables add little in terms of explanatory power. Surprisingly, the DM yield spread does not seem to have any predictive ability for the countries expected to participate in the EMU. However, a puzzling result was obtained: this variable appears to be significant for the UK market!Additionally, we find that investors, using simple trading strategies that exploit this information, may obtain higher returns. This outperformance is observed for different maturities, being more evident for long-term Government bonds.These findings may have important implications on other related issues such as market efficiency, asset pricing and portfolio performance evaluation.

Download or read book Is Imperfection Better Evidence from Predicting Stock and Bond Returns written by Katarina Lucivjanska and published by . This book was released on 2018 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: The standard predictive regression assumes expected returns to be perfectly correlated with predictors. In the recently-introduced predictive system, imperfect predictors account only for a partial variance in expected returns. However, the out-of-sample benefits of relaxing the assumption of perfect correlation are not clear. We compare the performance of the two models from an investor's perspective. In the Bayesian setup, we allow for various distributions of the coefficient of determination to account for different degrees of optimism about predictability. We find that relaxing the assumption of perfect predictors does not pay off out-of-sample. Furthermore, extreme optimism or pessimism reduces performance of both models.

Download or read book Liquidity Premium and Return Predictability in U S Inflation Linked Bonds Market written by Karoll Gomez and published by . This book was released on 2014 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper discusses the predictive role of alternative measures of the liquidity premium of TIPS relative to Treasury bonds for government excess bond returns. The results show that the liquidity premium predicts positive (negative) TIPS (nominal Treasury) excess returns. The explanatory power of the TIPS liquidity premium is statistically significant and economically meaningful for short-term excess TIPS maturities and for long-term nominal Treasury bonds. I also find that the out-of-sample forecasting power of liquidity for nominal Treasury excess returns appears to have been addressed by the events during the recent financial crisis. By contrast, I have evidence of out-of-sample forecasting ability during both normal and bad times for TIPS' excess returns.

Download or read book Forecasting Economic Time Series written by Michael Clements and published by Cambridge University Press. This book was released on 1998-10-08 with total page 402 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides a formal analysis of the models, procedures, and measures of economic forecasting with a view to improving forecasting practice. David Hendry and Michael Clements base the analyses on assumptions pertinent to the economies to be forecast, viz. a non-constant, evolving economic system, and econometric models whose form and structure are unknown a priori. The authors find that conclusions which can be established formally for constant-parameter stationary processes and correctly-specified models often do not hold when unrealistic assumptions are relaxed. Despite the difficulty of proceeding formally when models are mis-specified in unknown ways for non-stationary processes that are subject to structural breaks, Hendry and Clements show that significant insights can be gleaned. For example, a formal taxonomy of forecasting errors can be developed, the role of causal information clarified, intercept corrections re-established as a method for achieving robustness against forms of structural change, and measures of forecast accuracy re-interpreted.

Download or read book Maximizing Predictability in the Stock and Bond Markets written by Andrew W. Lo and published by . This book was released on 2010 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: We construct portfolios of stocks and of bonds that are maximally predictable with respect to a set of ex ante observable economic variables, and show that these levels of predictability are statistically significant, even after controlling for data-snooping biases. We disaggregate the sources for predictability by using several asset groups, including industry-sorted portfolios, and find that the sources of maximal predictability shift considerably across asset classes and sectors as the return-horizon changes. Using three out-of-sample measures of predictability, we show that the predictability of the maximally predictable portfolio is genuine and economically significant.

Download or read book Maximizing Predictability in the Stock and Bond Markets written by Andrew Wen-Chuan Lo and published by . This book was released on 1995 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: We construct portfolios of stocks and of bonds that are maximally predictable with respect to a set of ex ante observable economic variables, and show that these levels of predictability are statistically significant, even after controlling for data-snooping biases. We disaggregate the sources for predictability by using several asset groups, including industry-sorted portfolios, and find that the sources of maximal predictability shift considerably across asset classes and sectors as the return-horizon changes. Using three out-of-sample measures of predictability, we show that the predictability of the maximally predictable portfolio is genuine and economically significant