### Resumé

premia translates into economic gains for bond investors. We show that ane

term structure models (ATSMs) estimated by jointly tting yields and bond excess

returns capture this predictive information otherwise hidden to standard ATSM

estimations. The model's excess return predictions are unbiased, produce regression R2s beyond those reported in the literature, exhibit high forecast accuracy, and allow to generate positive bond portfolio excess returns in- and out-of-sample. Nevertheless, these models cannot beat the expectations hypothesis (EH) out-ofsample: the forecasts do not add economic value compared to using the average historical excess return as an EH-consistent estimate of constant risk premia. We show that in general statistical signicance does not necessarily translate into economic signicance because EH deviations mainly matter at short horizons and standard predictability metrics are not compatible with common measures of economic value. Overall, the EH remains the benchmark for investment decisions and should be considered an economic prior in models of bond risk premia.

premia translates into economic gains for bond investors. We show that ane

term structure models (ATSMs) estimated by jointly tting yields and bond excess

returns capture this predictive information otherwise hidden to standard ATSM

estimations. The model's excess return predictions are unbiased, produce regression R2s beyond those reported in the literature, exhibit high forecast accuracy, and allow to generate positive bond portfolio excess returns in- and out-of-sample. Nevertheless, these models cannot beat the expectations hypothesis (EH) out-ofsample: the forecasts do not add economic value compared to using the average historical excess return as an EH-consistent estimate of constant risk premia. We show that in general statistical signicance does not necessarily translate into economic signicance because EH deviations mainly matter at short horizons and standard predictability metrics are not compatible with common measures of economic value. Overall, the EH remains the benchmark for investment decisions and should be considered an economic prior in models of bond risk premia.

Sprog | Engelsk |
---|---|

Dato | 2013 |

Antal sider | 36 |

DOI | |

Status | Udgivet - 2013 |

Begivenhed | Research Seminar: Universität Innsbruck - Universität Innsbruck, Institut für Banken und Finanzen, Innsbruck, Østrig Varighed: 14 jan. 2013 → 14 jan. 2013 http://www.uibk.ac.at/ibf/sonstiges/seminar/seminar.html |

### Seminar

Seminar | Research Seminar |
---|---|

Lokation | Universität Innsbruck, Institut für Banken und Finanzen |

Land | Østrig |

By | Innsbruck |

Periode | 14/01/2013 → 14/01/2013 |

Internetadresse |

### Emneord

- Term structure of interest rates
- Expectations hypothesis
- Affine models
- Risk premia

### Citer dette

*The Economic Value of Predicting Bond Risk Premia: Can Anything Beat the Expectations Hypothesis?*. Afhandling præsenteret på Research Seminar, Innsbruck, Østrig.DOI: 10.2139/ssrn.2005178

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**The Economic Value of Predicting Bond Risk Premia : Can Anything Beat the Expectations Hypothesis?** / Sarno, Lucio ; Schneider, Paul ; Wagner, Christian.

Publikation: Bidrag til konference › Paper › Forskning

TY - CONF

T1 - The Economic Value of Predicting Bond Risk Premia

T2 - Can Anything Beat the Expectations Hypothesis?

AU - Sarno,Lucio

AU - Schneider,Paul

AU - Wagner,Christian

PY - 2013

Y1 - 2013

N2 - This paper studies whether the evident statistical predictability of bond riskpremia translates into economic gains for bond investors. We show that aneterm structure models (ATSMs) estimated by jointly tting yields and bond excessreturns capture this predictive information otherwise hidden to standard ATSMestimations. The model's excess return predictions are unbiased, produce regression R2s beyond those reported in the literature, exhibit high forecast accuracy, and allow to generate positive bond portfolio excess returns in- and out-of-sample. Nevertheless, these models cannot beat the expectations hypothesis (EH) out-ofsample: the forecasts do not add economic value compared to using the average historical excess return as an EH-consistent estimate of constant risk premia. We show that in general statistical signicance does not necessarily translate into economic signicance because EH deviations mainly matter at short horizons and standard predictability metrics are not compatible with common measures of economic value. Overall, the EH remains the benchmark for investment decisions and should be considered an economic prior in models of bond risk premia.

AB - This paper studies whether the evident statistical predictability of bond riskpremia translates into economic gains for bond investors. We show that aneterm structure models (ATSMs) estimated by jointly tting yields and bond excessreturns capture this predictive information otherwise hidden to standard ATSMestimations. The model's excess return predictions are unbiased, produce regression R2s beyond those reported in the literature, exhibit high forecast accuracy, and allow to generate positive bond portfolio excess returns in- and out-of-sample. Nevertheless, these models cannot beat the expectations hypothesis (EH) out-ofsample: the forecasts do not add economic value compared to using the average historical excess return as an EH-consistent estimate of constant risk premia. We show that in general statistical signicance does not necessarily translate into economic signicance because EH deviations mainly matter at short horizons and standard predictability metrics are not compatible with common measures of economic value. Overall, the EH remains the benchmark for investment decisions and should be considered an economic prior in models of bond risk premia.

KW - Term structure of interest rates

KW - Expectations hypothesis

KW - Affine models

KW - Risk premia

U2 - 10.2139/ssrn.2005178

DO - 10.2139/ssrn.2005178

M3 - Paper

ER -