The Economic Value of Predicting Bond Risk Premia: Can Anything Beat the Expectations Hypothesis?

Lucio Sarno, Paul Schneider, Christian Wagner

Publikation: Bidrag til konferencePaperForskning

Resumé

This paper studies whether the evident statistical predictability of bond risk
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.
This paper studies whether the evident statistical predictability of bond risk
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.

Seminar

SeminarResearch Seminar
LokationUniversität Innsbruck, Institut für Banken und Finanzen
LandØstrig
ByInnsbruck
Periode14/01/201314/01/2013
Internetadresse

Emneord

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

Citer dette

Sarno, L., Schneider, P., & Wagner, C. (2013). 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
Sarno, Lucio ; Schneider, Paul ; Wagner, Christian. / The Economic Value of Predicting Bond Risk Premia : Can Anything Beat the Expectations Hypothesis?. Afhandling præsenteret på Research Seminar, Innsbruck, Østrig.36 s.
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Sarno, L, Schneider, P & Wagner, C 2013, 'The Economic Value of Predicting Bond Risk Premia: Can Anything Beat the Expectations Hypothesis?' Paper fremlagt ved Research Seminar, Innsbruck, Østrig, 14/01/2013 - 14/01/2013, . DOI: 10.2139/ssrn.2005178

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

2013. Afhandling præsenteret på Research Seminar, Innsbruck, Østrig.

Publikation: Bidrag til konferencePaperForskning

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Sarno L, Schneider P, Wagner C. The Economic Value of Predicting Bond Risk Premia: Can Anything Beat the Expectations Hypothesis?. 2013. Afhandling præsenteret på Research Seminar, Innsbruck, Østrig. Tilgængelig fra, DOI: 10.2139/ssrn.2005178