scholarly journals Mind the (Convergence) Gap: Bond Predictability Strikes Back!

2021 ◽  
Author(s):  
Andrea Berardi ◽  
Michael Markovich ◽  
Alberto Plazzi ◽  
Andrea Tamoni
Keyword(s):  
Asset Allocation ◽  
Predictive Ability ◽  
The United States ◽  
Excess Returns ◽  
Natural Rate ◽  
Forward Rates ◽  
Bond Risk Premia ◽  
Out Of Sample ◽  
Natural Rate Of Interest ◽  
The Difference

We show that the difference between the natural rate of interest and the current level of monetary policy stance, which we label Convergence Gap (CG), contains information that is valuable for bond predictability. Adding CG in forecasting regressions of bond excess returns significantly raises the R2, and restores countercyclical variation in bond risk premia that is otherwise missed by forward rates. Consistent with the argument that CG captures the effect of real imbalances on the path of rates, our factor has predictive ability for real bond excess returns. The importance of the gap remains robust out-of-sample and in countries other than the United States. Furthermore, its inclusion brings significant economic gains in the context of dynamic conditional asset allocation. This paper was accepted by Gustavo Manso, finance.

scholarly journals The Natural Rate of Interest and Its Usefulness for Monetary Policy

2014 ◽  
Vol 104 (5) ◽  
pp. 37-43 ◽  
Author(s):  
Robert Barsky ◽  
Alejandro Justiniano ◽  
Leonardo Melosi
Keyword(s):  
United States ◽  
Monetary Policy ◽  
Lower Bound ◽  
Great Recession ◽  
State Of The Art ◽  
The United States ◽  
Natural Rate ◽  
The Great Recession ◽  
Natural Rate Of Interest ◽  
Comparable Magnitude

We estimate a state-of-the-art DSGE model to study the natural rate of interest in the United States over the last 20 years. The natural rate is highly procyclical, and fell substantially below zero in each of the last three recessions. Although the drop was of comparable magnitude across the three recessions, the decline was considerably more persistent in the Great Recession. We discuss the usefulness and limitations, particularly due to the zero lower bound, of the natural rate for the conduct of monetary policy.

scholarly journals The natural yield curve in Brazil

2019 ◽  
Vol 17 (4) ◽  
pp. 1
Author(s):  
Adonias Evaristo Da Costa Filho
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Phillips Curve ◽  
Yield Curve ◽  
Output Gap ◽  
Natural Rate ◽  
Natural Rate Of Interest ◽  
Natural Counterpart ◽  
The Difference ◽  
Highly Correlated

<p>This paper estimates the term structure of natural interest rates for Brazil, a generalization of the concept of natural rate of interest for the yield curve. First, the Diebold-Li (2006) model is estimated with real yields. The latent factors of this model are then used in a model that includes an IS and a Phillips curve. The natural yield curve is obtained as the level, slope and curvature that closes the output gap at each point in time. This decomposition allows a broader indicator of the stance of monetary policy and a real-time measure of the natural rate. The difference between the slope of the real curve and its natural counterpart is highly correlated with the output gap.</p>

scholarly journals International Capital Flows and Bond Risk Premia

2014 ◽  
Vol 04 (01) ◽  
pp. 1450001 ◽  
Author(s):  
Jesus Sierra
Keyword(s):  
Positive Impact ◽  
Excess Returns ◽  
Treasury Securities ◽  
Bond Risk Premia ◽  
Predictive Regressions ◽  
Out Of Sample ◽  
Negative Effect ◽  
Bond Risk

We investigate whether foreign purchases of long-term U.S. Treasury securities significantly affect their expected excess-returns. We run predictive regressions of realized excess returns on measures of net purchases of treasuries by both foreign official and private agents. We find that official flows, with a negative effect, appear similar to relative supply shocks; private flows, with a positive impact, resemble flows that absorb excess-supply and are thus compensated for this service, similar to the role of arbitrageurs. The results are robust to out-of-sample tests and the use of benchmark survey-consistent adjusted flows data.

scholarly journals Bond Risk Premia

2005 ◽  
Vol 95 (1) ◽  
pp. 138-160 ◽  
Author(s):  
John H Cochrane ◽  
Monika Piazzesi
Keyword(s):  
Stock Returns ◽  
Term Structure ◽  
Measurement Errors ◽  
Risk Premia ◽  
Excess Returns ◽  
Forward Rates ◽  
Bond Risk Premia ◽  
Bond Returns ◽  
Bond Risk ◽  
One Year

We study time variation in expected excess bond returns. We run regressions of one-year excess returns on initial forward rates. We find that a single factor, a single tent-shaped linear combination of forward rates, predicts excess returns on one-to five-year maturity bonds with R2 up to 0.44. The return-forecasting factor is countercyclical and forecasts stock returns. An important component of the return-forecasting factor is unrelated to the level, slope, and curvature movements described by most term structure models. We document that measurement errors do not affect our central results.

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