Robust Bond Risk Premia
63 Pages Posted: 5 Jun 2017 Last revised: 27 Feb 2022
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Robust Bond Risk Premia
Robust Bond Risk Premia
Date Written: June 2017
Abstract
A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus.
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