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Bond Risk Premia and the ”Return Forecasting Factor”

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  • Agustin Gutierrez
  • Constantino Hevia
  • Martin Sola

Abstract

The return forecasting factor is a linear combination of forward rates that seems to predict one-year excess bond returns of bond of all maturities better than traditional measures obtained from the yield curve. If this single factor actually captures all the relevant fluctuations in bond risk premia, then it should also summarize all the economically relevant variations in excess returns considering different holding periods. We find that it does not. We conclude that including the return forecasting factor as the main driver of risk premia in a term structure model, as has been suggested, is not supported by the data.

Suggested Citation

  • Agustin Gutierrez & Constantino Hevia & Martin Sola, 2018. "Bond Risk Premia and the ”Return Forecasting Factor”," Department of Economics Working Papers 2018_04, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2018_04
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    Keywords

    : Excess returns; bond risk premia; return forecasting factor; affine term structure models.;
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