A Factor Analysis Of Bond Risk Premia
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A Factor Analysis Of Bond Risk Premia
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Author : Sydney C. Ludvigson
language : en
Publisher:
Release Date : 2009
A Factor Analysis Of Bond Risk Premia written by Sydney C. Ludvigson and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with Bonds categories.
This paper uses the factor augmented regression framework to analyze the relation between bond excess returns and the macro economy. Using a panel of 131 monthly macroeconomic time series for the sample 1964:1-2007:12, we estimate 8 static factors by the method of asymptotic principal components. We also use Gibb sampling to estimate dynamic factors from the 131 series reorganized into 8 blocks. Regardless of how the factors are estimated, macroeconomic factors are found to have statistically significant predictive power for excess bond returns. We show how a bias correction to the parameter estimates of factor augmented regressions can be obtained. This bias is numerically trivial in our application. The predictive power of real activity for excess bond returns is robust even after accounting for finite sample inference problems. Forecasts of excess bond returns (or bond risk premia) are countercyclical. This implies that investors are compensated for risks associated with recessions.
Macro Factors In Bond Risk Premia
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Author : Sydney C. Ludvigson
language : en
Publisher:
Release Date : 2005
Macro Factors In Bond Risk Premia written by Sydney C. Ludvigson and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with Bonds categories.
Empirical evidence suggests that excess bond returns are forecastable by financial indicators such as forward spreads and yield spreads, a violation of the expectations hypothesis based on constant risk premia. But existing evidence does not tie the forecastable variation in excess bond returns to underlying macroeconomic fundamentals, as would be expected if the forecastability were attributable to time variation in risk premia. We use the methodology of dynamic factor analysis for large datasets to investigate possible empirical linkages between forecastable variation in excess bond returns and macroeconomic fundamentals. We find that several common factors estimated from a large dataset on U.S. economic activity have important forecasting power for future excess returns on U.S. government bonds. Following Cochrane and Piazzesi (2005), we also construct single predictor state variables by forming linear combinations of either five or six estimated common factors. The single state variables forecast excess bond returns at maturities from two to five years, and do so virtually as well as an unrestricted regression model that includes each common factor as a separate predictor variable. The linear combinations we form are driven by both "real" and "inflation" macro factors, in addition to financial factors, and contain important information about one year ahead excess bond returns that is not captured by forward spreads, yield spreads, or the principal components of the yield covariance matrix.
Modern Multi Factor Analysis Of Bond Portfolios
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Author : Giovanni Barone-Adesi
language : en
Publisher: Springer
Release Date : 2015-12-03
Modern Multi Factor Analysis Of Bond Portfolios written by Giovanni Barone-Adesi and has been published by Springer this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015-12-03 with Business & Economics categories.
Where institutions and individuals averagely invest the majority of their assets in money-market and fixed-income instruments, interest rate risk management could be seen as the single most important global financial issue. However, the majority of the key techniques used by most investors were developed several decades ago, and the advantages of multi-factor models are not fully recognised by many researchers and practitioners. This book provides clear and practical insight into bond portfolios and portfolio management through key empirical analysis. The authors use extensive sets of empirical data to describe the value potentially added by more recent techniques to manage interest rate risk relative to traditional techniques and to present empirical evidence of such an added value. Beginning with a description of the simplest models and moving on to the most complex, the authors offer key recommendations for the future of rate risk management.
Bond Risk Premia
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Author : John Howland Cochrane
language : en
Publisher:
Release Date : 2002
Bond Risk Premia written by John Howland Cochrane and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002 with Bonds categories.
This paper studies time variation in expected excess bond returns. We run regressions of annual excess returns on forward rates. We find that a single factor predicts 1-year excess returns on 1-5 year maturity bonds with an R2 up to 43%. The single factor is a tent-shaped linear function of forward rates. The return forecasting factor has a clear business cycle correlation: Expected returns are high in bad times, and low in good times, and the return-forecasting factor forecasts long-run output growth. The return-forecasting factor also forecasts stock returns, suggesting a common time-varying premium for real interest rate risk. The return forecasting factor is poorly related to level, slope, and curvature movements in bond yields. Therefore, it represents a source of yield curve movement not captured by most term structure models. Though the return-forecasting factor accounts for more than 99% of the time-variation in expected excess bond returns, we find additional, very small factors that forecast equally small differences between long term bond returns, and hence statistically reject a one-factor model for expected returns
Augmented Factor Models With Applications To Validating Market Risk Factors And Forecasting Bond Risk Premia
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Author : Jianqing Fan
language : en
Publisher:
Release Date : 2018
Augmented Factor Models With Applications To Validating Market Risk Factors And Forecasting Bond Risk Premia written by Jianqing Fan and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
We study factor models augmented by observed covariates that have explanatory powers on the unknown factors. In financial factor models, the unknown factors can be reasonably well explained by a few observable proxies, such as the Fama-French factors. In diffusion index forecasts, identified factors are strongly related to several directly measurable economic variables such as consumption-wealth variable, financial ratios, and term spread. With those covariates, both the factors and loadings are identifiable up to a rotation matrix even only with a finite dimension. To incorporate the explanatory power of these covariates, we propose a smoothed principal component analysis (PCA): (i) regress the data onto the observed covariates, and (ii) take the principal components of the fitted data to estimate the loadings and factors. This allows us to accurately estimate the percentage of both explained and unexplained components in factors and thus to assess the explanatory power of covariates. We show that both the estimated factors and loadings can be estimated with improved rates of convergence compared to the benchmark method. The degree of improvement depends on the strength of the signals, representing the explanatory power of the covariates on the factors. The proposed estimator is robust to possibly heavy-tailed distributions. We apply the model to forecast US bond risk premia, and find that the observed macroeconomic characteristics contain strong explanatory powers of the factors. The gain of forecast is more substantial when the characteristics are incorporated to estimate the common factors than directly used for forecasts.
Bond Risk Premia
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Author : Harald Tolleshaug
language : en
Publisher:
Release Date : 2009
Bond Risk Premia written by Harald Tolleshaug and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
Forecasting the expected returns on bonds with increasing certainty is wanted from all rational investors in the fixed income markets. The potential for higher returns increase with the ability to forecast expected returns, through better trading payoffs and improved hedging and risk management. The expectations hypothesis was long prevailing in the academical litterature. It stated that the rational investor was expected to require zero or at least a constant excess return on bonds with long maturity over short maturity. This is equal to no time varying risk premiums. It is however reasonable for the rational investor to have time varying risk preferences based on the economic situation and outlook for the future, as described by Cochrane (1999). Thus, bonds with different maturity may be priced with different risk in an efficient market, and accordingly have time varying risk premiums. The expectations hypothesis has thus been rejected. This has been manifested through the classical studies of Fama and Bliss (1987) as well as Campbell and Shiller (1991). These studies modelled predictions of bond returns on specific maturities, with a R2 up to 18%. In a new and original approach, Cochrane and Piazzesi (2005) models a single-factor that predicts bond returns of any maturity, with a R2 up to 44%, more than doubled from the studies mentioned above. This is done on the same dataset as Fama and Bliss (1987) used and would be a big discovery within the field, if the model can be accepted across time and datasets. I test the model of Cochrane and Piazzesi (2005) based on the framework that these used originally, as well as new tests they have provided as response to critique of the model. So far, no other paper has rejected this model on all these dimensions. I use very well accepted data, and reject the model in every dimension tested. This paper is thus the rejection of the Cochrane and Piazzesi (2005) single-factor bond forecasting model.
The Price And Quantity Of Interest Rate Risk
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Author : Jennifer N. Carpenter
language : en
Publisher:
Release Date : 2021
The Price And Quantity Of Interest Rate Risk written by Jennifer N. Carpenter and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2021 with categories.
Studies of the dynamics of bond risk premia that do not account for the corresponding dynamics of bond risk are hard to interpret. We propose a new approach to modeling bond risk and risk premia. For each of the US and China, we reduce the government bond market to its first two principal-component bond-factor portfolios. For each bond-factor portfolio, we estimate the joint dynamics of its volatility and Sharpe ratio as functions of yield curve variables, and of VIX in the US. We have three main findings. (1) There is an important second factor in bond risk premia. (2) Time variation in bond return volatility is as important as time variation in bond Sharpe ratios. (3) Bond risk premia are solely compensation for bond risk, as no-arbitrage theory predicts. Our approach also allows us to document interesting cyclical and secular time-variation in the term structure of bond risk premia in both the US and China.
Global Risk Premia On International Investments
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Author :
language : de
Publisher: Springer-Verlag
Release Date : 2013-07-01
Global Risk Premia On International Investments written by and has been published by Springer-Verlag this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-07-01 with Business & Economics categories.
Implementing unconditional as well as conditional beta pricing models, the author identifies global economic factors that affect the performance of international investments.
Bond Risk Analysis
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Author : Livingston G. Douglas
language : en
Publisher: Prentice Hall
Release Date : 1990
Bond Risk Analysis written by Livingston G. Douglas and has been published by Prentice Hall this book supported file pdf, txt, epub, kindle and other format this book has been release on 1990 with Business & Economics categories.
Local Currency Bond Risk Premia
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Author : Oguzhan Cepni
language : en
Publisher:
Release Date : 2019
Local Currency Bond Risk Premia written by Oguzhan Cepni and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
This paper investigates the source of variation in emerging market (EM) local currency bond risk premium by employing panel fixed effects regression model. Moreover, we use the methodology of dynamic factor model for large datasets to investigate the possible linkages between excess bond return and economic activity. We provide evidence that macroeconomic and financial variables contain valuable information in explaining local currency bond excess returns. Additionally, we extend our analysis with a panel threshold estimation to investigate how the influence of different factors may vary in different states of the markets depending on the level of global risk appetite. The results show that investors pay more attention to changes in macroeconomic fundamentals when the global risk aversion is high. Also, the influence of exchange rate volatility is more pronounced during the time of market stress. On the other hand, positive credit rating changes decrease the country risk premium which results in lower bond risk premium in tranquil times. Overall, these findings imply that global investors view the local currency debt market as a separate asset class and explore potential diversification benefit from investing in emerging markets by differentiating meaningfully in terms of macroeconomic and financial fundamentals.