Predicting bond excess returns with forward rates: an asset-allocation perspective
AbstractThis paper revisits the predictability of bond excess returns by means of long-term forward interest rates. We assess the economic value of out-of-sample forecasting ability of empirical models based on forward rates in a dynamic asset allocation strategy. Our results show that the information content of forward rates does not generate any systematic economic value to investors. The performance of the predictive models against the no-predictability benchmark worsens over time and the few positive performance fees recorded from dynamic portfolio strategies based on forward rates are generally small in size and do not offset realistic transaction costs.
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Bibliographic InfoPaper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-034.
Date of creation: 2010
Date of revision:
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