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Out-of-sample bond risk premium predictions: A global common factor

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  • Zhu, Xiaoneng

Abstract

This paper investigates the out-of-sample predictability of international bond risk premia. We endogenously construct a global common Cochrane and Piazzesi (2005) factor. We find that the global factor strongly predicts international bond risk premia and delivers economically significant gains relative to the historical average. The forecasting power of the global factor is above and beyond the predictive power contained in country-specific factors. As predicted by economic theories, bond return forecasts appear countercyclical. We also find that the global factor is related to international economic activity.

Suggested Citation

  • Zhu, Xiaoneng, 2015. "Out-of-sample bond risk premium predictions: A global common factor," Journal of International Money and Finance, Elsevier, vol. 51(C), pages 155-173.
  • Handle: RePEc:eee:jimfin:v:51:y:2015:i:c:p:155-173 DOI: 10.1016/j.jimonfin.2014.11.004
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    Cited by:

    1. Zhu, Xiaoneng & Rahman, Shahidur, 2015. "A regime-switching Nelson–Siegel term structure model of the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 1-17.

    More about this item

    Keywords

    Bond risk premia; Economic value; Global common factor; Return predictability; Out-of-sample forecasts;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance

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