Predictability Of Bond Risk Premia With An Affine Term Structure Model
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Predictability Of Bond Risk Premia With An Affine Term Structure Model
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Author : Sibel Korkmaz
language : en
Publisher:
Release Date : 2016
Predictability Of Bond Risk Premia With An Affine Term Structure Model written by Sibel Korkmaz and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with categories.
International Bond Risk Premia
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Author : Magnus Dahlquist
language : en
Publisher:
Release Date : 2015
International Bond Risk Premia written by Magnus Dahlquist and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
The endeavor to understand bond returns and the term structure of interest rates has generated an extensive literature, ranging from papers on return predictability and affine term structure models to theoretical contributions in the form of equilibrium models. While most of the empirical literature focuses on US data, a large body of work applies an international perspective. This chapter reviews the relevant literature while also providing empirical evidence on international bond risk premia and the link to the macroeconomy.
Analysis Of Bond Risk Premia
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Author : Lukas Wäger
language : en
Publisher:
Release Date : 2012
Analysis Of Bond Risk Premia written by Lukas Wäger and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2012 with categories.
The focus of this thesis is on bond return predictability and providing an empirical and economic understanding of bond risk premia. The thesis consists of an empirical analysis of time-varying bond risk premia along three major branches of the current term structure literature, namely yields-only, macro-finance and multi-currency term structure models. All these models belong to the well-known class of affine models introduced by Ang and Piazzesi (2003), whereas the latter two embed unspanned factors. Unspanned factors are state variables that have an effect on bond risk premia but do not span the cross-section of yields, as recently introduced by Duffee (2011), Joslin, Priebsch and Singleton (2011) and Boos (2011). The section concerning yields-only models contributes by providing evidence of three priced risk premia of bonds in the US market, extending the analysis of Cochrane and Piazzesi (2005) and Boos (2011). The section concerning macrofinance models adds to the new branch of models with unspanned macro factors and extends existing research by analyzing the effects of unspanned macro factors on risk premia beyond the level risk premium and extending into a broader and longer data set of macroeconomic variables. The section concerning multi-currency models firstly introduces unspanned factors into international models by taking mutually unspanned latent yield curve factors of domestic and foreign countries as state variables. The information in foreign yield curves is found to be partly unspanned by the domestic yield curve and improves bond return predictability beyond local models.
The Volatility Of Long Term Bond Returns
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Author : Daniela Osterrieder
language : en
Publisher:
Release Date : 2018
The Volatility Of Long Term Bond Returns written by Daniela Osterrieder 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 develop a model that can match two stylized facts of the term-structure. The first stylized fact is the predictability of excess returns on long-term bonds. Modeling this requires sufficient volatility and persistence in the price of risk. The second stylized fact is that long-term yields are dominated by a level factor, which requires persistence in the spot interest rate. We find that a fractionally integrated process for the short rate plus a fractionally integrated specification for the price of risk leads to an analytically tractable almost affine term structure model that can explain the stylized facts. In a decomposition of long-term bond returns we find that the expectations component from the level factor is more volatile than the returns themselves. It therefore takes a volatile risk premium that is negatively correlated with innovations in the level factor to explain the volatility of long-term bond returns. The model also implies that excess bond returns do not exhibit mean reversion, consistent with the empirical evidence.
Bond Risk Premia In Consumption Based Models
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Author : Drew D. Creal
language : en
Publisher:
Release Date : 2016
Bond Risk Premia In Consumption Based Models written by Drew D. Creal and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016 with Bonds categories.
Workhorse Gaussian affine term structure models (ATSMs) attribute time-varying bond risk premia entirely to changing prices of risk, while structural models with recursive preferences credit it completely to stochastic volatility. We reconcile these competing channels by introducing a novel form of external habit into an otherwise standard model with recursive preferences. The new model has an ATSM representation with analytical bond prices making it empirically tractable. We find that time variation in bond term premia is predominantly driven by the price of risk, especially, the price of expected inflation risk that co-moves with expected inflation itself.
Expectation Puzzles Time Varying Risk Premia And Dynamic Models Of The Term Structure
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Author : Qiang Dai
language : en
Publisher:
Release Date : 2001
Expectation Puzzles Time Varying Risk Premia And Dynamic Models Of The Term Structure written by Qiang Dai and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with Bond yields - Forecasting categories.
Though linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory, ' we show that these findings are not puzzling relative to a large class of richer dynamic term structure models. Specifically, we are able to match all of the key empirical findings reported by Fama and Bliss and Campbell and Shiller, among others, within large subclasses of affine and quadratic-Gaussian term structure models. Additionally, we show that certain risk-premium adjusted' projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models. Key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly, and not only through the factor volatilities. The risk premiums have a simple form consistent with Fama's findings on the predictability of forward rates, and are shown to also be consistent with interest rate, feedback rules used by a monetary authority in setting monetary policy
Revisiting The Predictability Of Bond Risk Premia
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Author : Daniel L. Thornton
language : en
Publisher:
Release Date : 2009
Revisiting The Predictability Of Bond Risk Premia written by Daniel L. Thornton 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.
This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. After a simple reparametrization of models used to predict spot rates or excess returns, we find that forward rates exhibit much less predictive power than previously recorded. Furthermore, our economic value analysis indicates that there are no economic gains to mean-variance investors who use the predictions of these models in a stylized dynamic asset allocation strategy.
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
Bond Risk Premia And Realized Jump Risk
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Author : Jonathan H. Wright
language : en
Publisher:
Release Date : 2009
Bond Risk Premia And Realized Jump Risk written by Jonathan H. Wright 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.
We find that augmenting a regression of excess bond returns on the term structure of forward rates with an estimate of the mean realized jump size almost doubles the R2 of the forecasting regression. The return predictability from augmenting with the jump mean easily dominates that offered by augmenting with options-implied volatility and realized volatility from high frequency data. In out-of-sample forecasting exercises, inclusion of the jump mean can reduce the root mean square prediction error by up to 40 percent. The incremental return predictability captured by the realized jump mean largely accounts for the countercyclical movements in bond risk premia. This result is consistent with the setting of an incomplete market in which the conditional distribution of excess bond returns is affected by a jump risk factor that does not lie in the span of the term structure of yields.
Speculation Risk Premia And Expectations In The Yield Curve
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Author : Francisco Barillas
language : en
Publisher:
Release Date : 2013
Speculation Risk Premia And Expectations In The Yield Curve written by Francisco Barillas and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013 with Bond market categories.
An affine asset pricing model in which agents have rational but heterogeneous expectations about future asset prices is developed. We estimate the model using data on bond yields and individual survey responses from the Survey of Professional Forecasters and perform a novel three-way decomposition of bond yields into (i) average expectations about short rates (ii) risk premia and (iii) a speculative component due to heterogeneous expectations about the resale value of a bond. We prove that the speculative term must be orthogonal to public information in real time and therefore statistically distinct from risk premia. Empirically, the speculative component is quantitatively important, accounting for up to one percentage point of US yields. Furthermore, estimates of historical risk premia from the heterogeneous information model are less volatile than, and negatively correlated with, risk premia estimated using a standard Affine Gaussian Term Structure model.