Robust Bond Risk Premia
59 Pages Posted: 6 Nov 2015
There are 3 versions of this paper
Robust Bond Risk Premia
Robust Bond Risk Premia
Robust Bond Risk Premia
Date Written: October 12, 2015
Abstract
A consensus has recently emerged that a number of variables in addition to the level, slope, and curvature of the term structure can help predict interest rates and excess bond returns. We demonstrate that the statistical tests that have been used to support this conclusion are subject to very large size distortions from a previously unrecognized problem arising from highly persistent regressors and correlation between the true predictors and lags of the dependent variable. We revisit the evidence using tests that are robust to this problem and conclude that the current consensus is wrong. Only the level and the slope of the yield curve are robust predictors of excess bond returns, and there is no robust and convincing evidence for unspanned macro risk.
Keywords: yield curve, spanning, bond returns, small-sample bias, robust inference
JEL Classification: E430, E440, E470
Suggested Citation: Suggested Citation