Forecasting Government Bond Risk Premia Using Technical Indicators

Abstract

While economic variables have been used extensively to forecast bond risk premia, little attention has been paid to technical indicators which are widely used by practitioners. In this paper, we study the predictive ability of a variety of technical indicators vis-a-vis the economic variables. We find that technical indicators have significant in both in- and out-of-sample forecasting power. Moreover, we find that using information from both technical indicators and economic variables increases the forecasting performance substantially. We also find that the economic value of bond risk premia forecasts from our methodology is comparable to that of equity risk premium forecasts.

Keywords: Bond risk premium predictability, Economic variables, Technical analysis, Moving average rules, Volume, Out-of-sample forecasts, Principal components

JEL Classification: C53, C58, G11, G12, G17