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

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  • Zhu, Xiaoneng
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    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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0261560614001910
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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 51 (2015)
    Issue (Month): C ()
    Pages: 155-173

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    Handle: RePEc:eee:jimfin:v:51:y:2015:i:c:p:155-173
    DOI: 10.1016/j.jimonfin.2014.11.004
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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