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Robust Bond Risk Premia

Author

Listed:
  • Michael D. Bauer
  • James D. Hamilton

Abstract

A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus. Received January 21, 2016; editorial decision May 30, 2017 by Editor Stijn Van Nieuwerburgh.

Suggested Citation

  • Michael D. Bauer & James D. Hamilton, 2018. "Robust Bond Risk Premia," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 399-448.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:2:p:399-448.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx096
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    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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