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What 200 years of data tell us about the predictive variance of long-term bonds

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Listed:
  • Della Corte, Pasquale
  • Gao, Can
  • Preve, Daniel P. A.
  • Valente, Giorgio

Abstract

This paper investigates the long-horizon predictive variance of an international bond strategy where a U.S. investor holds unhedged positions in constant-maturity long-term foreign bonds funded at domestic short-term interest rates. Using over two centuries of data from major economies, the study finds that predictive variance grows with the investment horizon, driven primarily by uncertainties in interest rate differentials and exchange rate returns, which outweigh mean reversion effects. The analysis, incorporating both observable and unobservable predictors, highlights that unobservable predictors linked to shifts in monetary and exchange rate regimes are the dominant source of long-term risk, offering fresh insights into international bond investment strategies.

Suggested Citation

  • Della Corte, Pasquale & Gao, Can & Preve, Daniel P. A. & Valente, Giorgio, 2025. "What 200 years of data tell us about the predictive variance of long-term bonds," SAFE Working Paper Series 460, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:331899
    DOI: 10.2139/ssrn.5734512
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    References listed on IDEAS

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    1. Kim, Tae-Hwan & White, Halbert, 2004. "On more robust estimation of skewness and kurtosis," Finance Research Letters, Elsevier, vol. 1(1), pages 56-73, March.
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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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