Reexamining time-varying bond risk premia in the post-financial crisis era

Since the 2008 financial crisis, international interest rates have moved trivially over time, and have become less autocorrelated. Some previous empirical findings are thus no longer valid. This paper reexamines the changes in interest rate dynamics and the bond risk premia predictability for international markets. In contrast with previous studies, we document that the single forward rate displays statistically and economically significant in-sample and out-of-sample forecasting power on bond excess returns since the financial crisis. The good performance of the single forward rate means that forecasts tend to be more idiosyncratic, that is, most of variation in n-year expected excess return corresponds to n-year forward rate, rather than forward rates with other maturities. Calibrating an affine model suggests that the weak persistence of interest rates is driven by the underlying state variables that become less autocorrelated.