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Out-of-Sample Predictions of Bond Excess Returns and Forward Rates: An Asset Allocation Perspective

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  • Daniel L. Thornton
  • Giorgio Valente

Abstract

This article investigates the out-of-sample predictability of bond excess returns. We assess the economic value of the forecasting ability of empirical models based on long-term forward interest rates in a dynamic asset allocation strategy. The results show that the information content of forward rates does not generate systematic economic value to investors. Indeed, these models do not outperform the no-predictability benchmark. Furthermore, their relative performance deteriorates over time. The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Suggested Citation

  • Daniel L. Thornton & Giorgio Valente, 2012. "Out-of-Sample Predictions of Bond Excess Returns and Forward Rates: An Asset Allocation Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 25(10), pages 3141-3168.
    • Handle: RePEc:oup:rfinst:v:25:y:2012:i:10:p:3141-3168
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    File URL: http://hdl.handle.net/10.1093/rfs/hhs069
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