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Robust Bond Risk Premia

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  • Michael D. Bauer
  • James D. Hamilton

Abstract

A consensus has recently emerged that a number of variables in addition to the level, slope, and curvature of the term structure can help predict interest rates and excess bond returns. We demonstrate that the statistical tests that have been used to support this conclusion are subject to very large size distortions from a previously unrecognized problem arising from highly persistent regressors and correlation between the true predictors and lags of the dependent variable. We revisit the evidence using tests that are robust to this problem and conclude that the current consensus is wrong. Only the level and the slope of the yield curve are robust predictors of excess bond returns, and there is no robust and convincing evidence for unspanned macro risk.

Suggested Citation

  • Michael D. Bauer & James D. Hamilton, 2015. "Robust Bond Risk Premia," CESifo Working Paper Series 5541, CESifo.
  • Handle: RePEc:ces:ceswps:_5541
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    More about this item

    Keywords

    yield curve; spanning; bond returns; small-sample bias; robust inference;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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