Download or read book Yield Curve Factors Yield Volatility and the Predictability of Bond Excess Returns written by Nikolaus Hautsch and published by . This book was released on 2008 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the predictability of U.S. government bond excess returns using yield curve factors as well as yield volatility components. The yield curve factors are the level, slope and curvature factors extracted from a dynamic Nelson and Siegel (1987) framework. The yield volatility factors correspond to stochastic volatility components associated with the Nelson-Siegel factors, and capture time-varying risk inherent to the yield curve. The model is estimated using Markov chain Monte Carlo techniques based on U.S. government yields.We find that the slope and curvature yield factors explain up to 36% of the variation in future yearly bond excess returns revealing the same predictability as the return-forecasting factor proposed by Cochrane and Piazzesi (2005). Moreover, it turns out that the volatility factors parsimoniously and effectively capture yield curve risk. Including them in forecasting regressions for bond return premia increases the forecasting R-Squared to up to 50%. It is shown that the predictive power of the volatility factors is neither subsumed by Nelson-Siegel type yield curve factors nor the Cochrane-Piazzesi return-forecasting factor. Moreover, we illustrate that the extracted yield curve factors and volatility factors are closely connected to underlying macroeconomic fundamentals.

Download or read book Yield Curve Factors Factor Volatilities and the Predictability of Bond Excess Returns written by Nikolaus Hautsch and published by . This book was released on 2008 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We introduce a Nelson-Siegel type interest rate term structure model with the underlying yield factors following autoregressive processes revealing time-varying stochastic volatility. The factor volatilities capture risk inherent to the term structure and are associated with the time-varying uncertainty of the yield curve's level, slope and curvature. Estimating the model based on U.S. government bond yields applying Markov chain Monte Carlo techniques we find that the yield factors and factor volatilities follow highly persistent processes. Using the extracted factors to explain one-year-ahead bond excess returns we observe that the slope and curvature yield factors contain the same explanatory power as the return-forecasting factor recently proposed by Cochrane and Piazzesi (2005). Moreover, we identify slope and curvature risk as important additional determinants of future excess returns. Finally, we illustrate that the yield and volatility factors are closely connected to variables reflecting macroeconomic activity, inflation, monetary policy and employment growth. It is shown that the extracted yield curve components have long-term prediction power for macroeconomic fundamentals.

Download or read book Yield Curve Analysis written by Livingston G. Douglas and published by Prentice Hall. This book was released on 1988 with total page 664 pages. Available in PDF, EPUB and Kindle. Book excerpt: With their increasing complexity, the fixed-income markets have made greater demands upon their participants. To be successful -- in this era of heightened volatility, especially -- requires a firm foundation in the precepts underlying the behavior of fixed-income investments. This book answers that need by presenting a comprehensive analysis of the two primary concepts: risk and return. Its four major sections develop and apply these concepts clearly and progressively, with outline and summary aids to enhance understanding and ample illustrations to reinforce the explanations.

Download or read book Riding the Yield Curve Risk Taking Behavior in a Low Interest Rate Environment written by Mr.Ralph Chami and published by International Monetary Fund. This book was released on 2020-03-13 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities. We study changes in risk taking behavior in a low interest rate environment by estimating a market stochastic discount factor that is non-linear and therefore consistent with the empirical properties of cashflow valuations identified in the literature. We provide evidence that non-linearities arise from hedging strategies of investors exposed to interest rate risk. Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.

Download or read book Inside the Yield Book written by Martin L. Leibowitz and published by John Wiley & Sons. This book was released on 2013-04-29 with total page 374 pages. Available in PDF, EPUB and Kindle. Book excerpt: A completely updated edition of the guide to modern bond analysis First published in 1972, Inside the Yield Book revolutionized the fixed-income industry and forever altered the way investors looked at bonds. Over forty years later, it remains a standard primer and reference among market professionals. Generations of practitioners, investors, and students have relied on its lucid explanations, and readers needing to delve more deeply have found its explication of key mathematical relationships to be unmatched in clarity and ease of application. This edition updates the widely respected classic with new material from Martin L. Leibowitz. Along the way, it skillfully explains and makes sense of essential mathematical relationships that are basic to an understanding of bonds, annuities, and loans—in fact, any securities or investments that involve compound interest and the determination of present value for future cash flows. The book also includes a new foreword. Contains information that is more instructive, important, and useful than ever for mastering the crucial concepts of time, value, and return Combines the clear fixed-income insights found in the original edition with completely new knowledge to help you navigate today's dynamic market Includes over one hundred pages of new material on the role of bonds within the total portfolio In an era of calculators and computers, some of the important underlying principles covered here are not always grasped thoroughly by market participants. Investors, traders, and analysts who want to sharpen their ability to recall and apply these fundamentals will find Inside the Yield Book the perfect resource.

Download or read book The Volatility of Long Term Bond Returns written by Daniela Osterrieder and published by . This book was released on 2018 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a model that can match two stylized facts of the term-structure. The first stylized fact is the predictability of excess returns on long-term bonds. Modeling this requires sufficient volatility and persistence in the price of risk. The second stylized fact is that long-term yields are dominated by a level factor, which requires persistence in the spot interest rate. We find that a fractionally integrated process for the short rate plus a fractionally integrated specification for the price of risk leads to an analytically tractable almost affine term structure model that can explain the stylized facts. In a decomposition of long-term bond returns we find that the expectations component from the level factor is more volatile than the returns themselves. It therefore takes a volatile risk premium that is negatively correlated with innovations in the level factor to explain the volatility of long-term bond returns. The model also implies that excess bond returns do not exhibit mean reversion, consistent with the empirical evidence.

Download or read book Yield Curve Factors Term Structure Volatility and Bond Risk Premia written by Nikolaus Hautsch and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Return Predictability and Yield Factors written by Xuyang Ma and published by . This book was released on 2014 with total page 95 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation includes three chapters in which the first two are on return predictability and the third is on yield curve and yield factors. The abstract of each of them is as follows: 1), This paper proposes using capital gains instead of total returns in return predictability tests. Total return predictability can be inferred from capital gain predictability since total returns with dividends are highly correlated with returns based on capital gains only. An exact linear relationship exists among log dividend growth, log capital gain and log dividend price ratio. This exact linear relationship has similar implication as the Campbell-Shiller (1988) linear approximation but is more precise and easier for predictability tests. I verify the standard empirical findings on return predictability using capital gain predictability. Separation of price change and dividend change also leads to a new finding: shocks to dividend growth is shown to have significant positive correlation with shocks to dividend price ratio in the vector autoregressive regression (VAR) rather than close to zero as shown in previous literature. 2), This paper tests the return predictability of the cyclical and trend components in the log dividend price ratio. The log dividend ratio is found to have a near-unit root trend factor if the expectation of the future discount factor is highly persistent. We use Bayesian analysis and the Kalman filter to extract the strictly stationary and near-random-walk components in the log dividend price ratio. The extracted cyclical process can predict one-year ahead total returns during the post-war period and one-year ahead dividend growth rates during the pre-war and war period with notable R^2. We also demonstrate a reverse of predictability: returns become more predictable while dividend growth rates become more unpredictable. 3), This paper examines the fourth principal component of the yields matrix, which is largely ignored in macro-finance forecasting applications, in the context of predicting excess bond returns. Using yields data from the Fama-Bliss and the Federal Reserve, we present the significant in-sample and out-of-sample predictive power of models including the fourth yield factor. Additionally, the "return-forecasting factor" in Cochrane and Piazzesi (2005) is shown to be a restricted linear combination of all yield factors and to be highly correlated with the second and fourth factors. We interpret the fourth yield factor as a factor representing "S-shape" (the shape of a sigmoid curve) and demonstrate the connection between the S-shape factor and the yield curve.

Download or read book The Economics of Recent Bond Yield Volatility written by C. E. V. Borio and published by Bank for International Settlements. This book was released on 1996 with total page 140 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book The Natural Rate of Interest and Bond Returns written by Ashish Garg and published by . This book was released on 2017 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: A growing literature argues that slower output growth is one of the main contributing factors to the fall in the natural rate of interest. Consistent with this evidence, we show empirically that real GDP growth is a major driver of the nominal yield curve. Specifically, the rate of economic growth constitutes a macroeconomic anchor that characterizes the path of the real short rate and influences the expectations hypothesis component embedded in bond yields. As a result, including growth data in canonical yield-curve models delivers significant gains in the predictability of bond excess returns in the United States and seven other developed economies.

Download or read book The Variation in the Structure of Risks Driving the Yield Curve written by He Zhang and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents the newly developed weight-parameterized portfolio policy to seek for an optimal portfolio of different bonds and investigates the predictability of macroeconomic factors for bond returns. The weight of each bond in the portfolio is directly modeled as a function of bonds' maturities and sensitivities to macroeconomic factors. A rolling regression approach is applied to obtain the sensitivities as characteristics of each bond which lead to the deviation from benchmark weight. Two forms of benchmark portfolio are discussed and compared. This article finds that the active optimal portfolio over-performs benchmark and the macroeconomic variables do affect the bond weight in optimal portfolio. Out-of-sample experiment shows little robustness in bond portfolio. Direct estimation with different risk aversion reveals investors with higher risk aversion tend to hold long-term bond.

Download or read book Economic Forecasting written by Graham Elliott and published by Princeton University Press. This book was released on 2016-04-05 with total page 566 pages. Available in PDF, EPUB and Kindle. Book excerpt: A comprehensive and integrated approach to economic forecasting problems Economic forecasting involves choosing simple yet robust models to best approximate highly complex and evolving data-generating processes. This poses unique challenges for researchers in a host of practical forecasting situations, from forecasting budget deficits and assessing financial risk to predicting inflation and stock market returns. Economic Forecasting presents a comprehensive, unified approach to assessing the costs and benefits of different methods currently available to forecasters. This text approaches forecasting problems from the perspective of decision theory and estimation, and demonstrates the profound implications of this approach for how we understand variable selection, estimation, and combination methods for forecasting models, and how we evaluate the resulting forecasts. Both Bayesian and non-Bayesian methods are covered in depth, as are a range of cutting-edge techniques for producing point, interval, and density forecasts. The book features detailed presentations and empirical examples of a range of forecasting methods and shows how to generate forecasts in the presence of large-dimensional sets of predictor variables. The authors pay special attention to how estimation error, model uncertainty, and model instability affect forecasting performance. Presents a comprehensive and integrated approach to assessing the strengths and weaknesses of different forecasting methods Approaches forecasting from a decision theoretic and estimation perspective Covers Bayesian modeling, including methods for generating density forecasts Discusses model selection methods as well as forecast combinations Covers a large range of nonlinear prediction models, including regime switching models, threshold autoregressions, and models with time-varying volatility Features numerous empirical examples Examines the latest advances in forecast evaluation Essential for practitioners and students alike

Download or read book Bond Risk Bond Return Volatility and the Term Structure of Interest Rates written by Luis M. Viceira and published by . This book was released on 2007 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper explores time variation in bond risk, as measured by the covariation of bond returns with stock returns and with consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yield on long-term bonds and short-term bonds forecasts positively future excess returns on bonds at varying horizons, and that the short-term nominal interest rate forecasts positively stock return volatility and exchange rate volatility. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component, and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with larger discount rate risk for bonds. The short rate forecasts only the discount rate component of bond beta.

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 Bond Pricing and Yield Curve Modeling written by Riccardo Rebonato and published by . This book was released on 2018-06-07 with total page 781 pages. Available in PDF, EPUB and Kindle. Book excerpt: Rebonato provides an authoritative, clear, and up-to-date explanation of the cutting-edge innovations in affine modeling for government bonds, and provides readers with the precise tools to develop their own models. This book combines precise theory with up-to-date empirical evidence to build, with the minimum mathematical sophistication required for the task, a critical understanding of what drives the government bond market.

Download or read book Factor Investing and Asset Allocation A Business Cycle Perspective written by Vasant Naik and published by CFA Institute Research Foundation. This book was released on 2016-12-30 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt: