Predictability of Bond Risk Premia

Abstract

The notion of time-varying risk premia has great implications from an economic standpoint. We study the predictability of bond risk premia in the US, Australia, Canada, Switzerland, Germany, UK, and Japan, and whether predictive models can generate real-time excess returns. We nd that Cochrane and Piazzesi's (2005) single factor is a signi cant driver of bond risk premia variations, although its signi cance has weakened lately. In contrast, Dahlquist and Hasseltoft's (2013) global single factor has increased in signi cance, on average explaining 20% of bond risk premia variations. The global single factor appears to produce real-time excess returns when adopting a simple trading setup with direction accuracy as the objective function.