scholarly journals Bond risk premia and the return forecasting factor

2019 ◽  
Vol 24 (1) ◽  
Author(s):  
Agustin Gutierrez ◽  
Constantino Hevia ◽  
Martin Sola
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Risk Premia ◽  
Term Structure Model ◽  
Forward Rates ◽  
Bond Risk Premia ◽  
Bond Returns ◽  
Main Driver ◽  
Bond Risk ◽  
Better Than

Abstract The return forecasting factor is a linear combination of forward rates that seems to predict 1-year excess bond returns of bond of all maturities better than traditional measures obtained from the yield curve. If this single factor actually captures all the relevant fluctuations in bond risk premia, then it should also summarize all the economically relevant variations in excess returns considering different holding periods. We find that it does not. We conclude that including the return forecasting factor as the main driver of risk premia in a term structure model, as has been suggested, is not supported by the data.

Forecasting Bond Risk Premia with Unspanned Macroeconomic Information

2019 ◽  
Vol 09 (01) ◽  
pp. 1940001
Author(s):  
Rui Liu
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Predictive Accuracy ◽  
Risk Premia ◽  
Term Structure Model ◽  
Bond Risk Premia ◽  
Macroeconomic Information ◽  
Combining Forecasts ◽  
Bond Risk ◽  
Macro Finance

I provide evidence on the existence of unspanned macro risk. I investigate the usefulness of unspanned macro information for forecasting bond risk premia in a macro-finance term structure model from the perspective of a bond investor. I account for model uncertainty by combining forecasts with and without unspanned output and inflation risks optimally from the forecaster’s objective. Incorporating macro information generates significant gains in forecasting bond risk premia relative to yield curve information at long forecast horizons, especially when allowing for time-varying combination weight. These gains in predictive accuracy significantly improve investor utility.

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.

A Consumption Based Term Structure Model w ith Habit Utility

2018 ◽  
Vol 9 (6) ◽  
pp. 484-496
Author(s):  
Jun Lou ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Yields ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Bond Risk Premia ◽  
The Interest Rate ◽  
Bond Risk

This paper proposes a term structure of interest rates model that modifies and extends the Campbell and Cochrane (1999) surplus consumption framework. The distinguishing contributions are tractable, continuous-time analytical solutions for the term structure of interest rate generating a realistic upward sloping yield curve. Despite the focus on the term structure, the model matches plausible equity quantities. For the interest rate, the model is able to account for the moments of bond yields at numerous maturities and produce countercyclical bond risk premia as seen in the data. Moreover, the model captures reasonable time series fluctuation on real interest rates. However, the model has difficulties reproducing empirical deviations from the expectations hypothesis.

scholarly journals The Role of Jumps and Options in the Risk Premia of Interest Rates

2019 ◽  
Vol 38 (2) ◽  
pp. 263
Author(s):  
Bruno Lund
Keyword(s):  
Interest Rates ◽  
Risk Premium ◽  
Yield Curve ◽  
Explanatory Power ◽  
Gaussian Model ◽  
Risk Premia ◽  
Constant Intensity ◽  
Term Structure Model ◽  
Bond Risk Premia ◽  
Bond Risk

<p>There is evidence that jumps double the explanatory power of Campbell and Shiller (1991) excess bond returns’ regressions (Wright and Zhou, 2009), and options bring information about bond risk premia beyond that spanned by the yield curve (Joslin, 2007). In this paper I incorporate these features in a Gaussian Affine Term Structure Model (ATSM) in order to assess two questions: (1) what are the implications of incorporating jumps in an ATSM for option pricing, and (2) how jumps and options affect the bond risk-premia dynamics.</p><p>The main findings are: (1) jump risk-premia is negative in a scenario of decreasing interest rates, and has a significant average magnitude of 1% to 2%, which means that, it explains 10% to 20% of the level of the yields; (2) the Gaussian model (A30) and the Gaussian model with constant intensity jumps (A30J) are the ones that best fit the option prices; and (3) the Gaussian model with constant intensity jumps estimated jointly with options (A30oJ) is the one that best identifies the risk premium.</p>

Bond Risk Premia: The Information in Really Long-Maturity Forward Rates

2021 ◽  
Author(s):  
Andrea Berardi ◽  
Roger Brown ◽  
Stephen M. Schaefer
Keyword(s):  
Risk Premia ◽  
Forward Rates ◽  
Bond Risk Premia ◽  
Bond Risk

scholarly journals Bond Risk Premia and Gaussian Term Structure Models

2018 ◽  
Vol 64 (3) ◽  
pp. 1413-1439 ◽  
Author(s):  
Bruno Feunou ◽  
Jean-Sébastien Fontaine
Keyword(s):  
Term Structure ◽  
Risk Premia ◽  
Term Structure Models ◽  
Bond Risk Premia ◽  
Bond Risk

scholarly journals Bond risk premia in consumption‐based models

10.3982/qe887 ◽  
2020 ◽  
Vol 11 (4) ◽  
pp. 1461-1484 ◽  
Author(s):  
Drew D. Creal ◽  
Jing Cynthia Wu
Keyword(s):  
Term Structure ◽  
Time Preference ◽  
Risk Premia ◽  
Recursive Preferences ◽  
Affine Term Structure ◽  
Affine Term Structure Models ◽  
Bond Risk Premia ◽  
Bond Risk ◽  
Term Premia ◽  
Conditional Means

Gaussian affine term structure models attribute time‐varying bond risk premia to changing risk prices driven by the conditional means of the risk factors, while structural models with recursive preferences credit it to stochastic volatility. We reconcile these competing channels by introducing a novel form of stochastic rate of time preference into an otherwise standard model with recursive preferences. Our model is affine and has analytical bond prices making it empirically tractable. We use particle Markov chain Monte Carlo to estimate the model, and find that time variation in bond term premia is predominantly driven by the risk price channel.

The Yield Spread and Bond Return Predictability in Expansions and Recessions

2020 ◽  
Author(s):  
Martin M Andreasen ◽  
Tom Engsted ◽  
Stig V Møller ◽  
Magnus Sander
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Return Predictability ◽  
Yield Spread ◽  
Market Prices ◽  
Term Structure Model ◽  
Bond Returns ◽  
Bond Return ◽  
Key Driver ◽  
Macro Finance

Abstract This paper uncovers that expected excess bond returns display a positive correlation with the slope of the yield curve (i.e., yield spread) in expansions but a negative correlation in recessions. We use a macro-finance term structure model with different market prices of risk in expansions and recessions to show that a very accommodating monetary policy in recessions is a key driver of this switch in return predictability.

scholarly journals Short-Run Bond Risk Premia

2019 ◽  
Vol 09 (03) ◽  
pp. 1950011
Author(s):  
Philippe Mueller ◽  
Andrea Vedolin ◽  
Hao Zhou
Keyword(s):  
Risk Premium ◽  
Predictive Power ◽  
Risk Premia ◽  
Forward Rates ◽  
Variance Risk Premium ◽  
Bond Risk Premia ◽  
Short Run ◽  
Variance Risk ◽  
Bond Risk ◽  
The One

In the short-run, bond risk premia exhibit pronounced spikes around major economic and financial crises. In contrast, long-term bond risk premia feature cyclical swings. We empirically examine the predictability of the market variance risk premium — a proxy of economic uncertainty — for bond risk premia and we show the strong predictive power for the one-month horizon that quickly recedes for longer horizons. The variance risk premium is largely orthogonal to well-established bond return predictors — forward rates, jumps, and macro variables. We rationalize our empirical findings in an equilibrium model of uncertainty about consumption and inflation which is coupled with recursive preferences. We show that the model can quantitatively explain the levels of bond and variance risk premia as well as the predictive power of the variance risk premium, while jointly matching salient features of other asset prices.

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