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Expected Business Conditions and Bond Risk Premia

  • Jonas N. Eriksen

Abstract

In this article, I study the predictability of bond risk premia by means of expectations to future business conditions using survey forecasts from the Survey of Professional Forecasters. I show that expected business conditions consistently affect excess bond returns and that the inclusion of expected business conditions in standard predictive regressions improve forecast performance relative to models using information derived from the current term structure or macroeconomic variables. The results are confirmed in a real-time out-of-sample exercise, where the predictive accuracy of the models is evaluated both statistically and from the perspective of a mean-variance investor that trades in the bond market.

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Corresponding author

* Eriksen (corresponding author), jeriksen@econ.au.dk, CREATES, Department of Economics and Business Economics, Aarhus University.

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I am grateful to an anonymous referee, Paul Malatesta (the editor), Stig V. Møller, Thomas Q. Pedersen, Jesper Rangvid, Maik Schmeling, Andreas Schrimpf, and seminar participants at Aarhus University and CREATES and the 2015 Nordic Econometric Meeting in Helsinki for helpful comments and suggestions. I acknowledge support from CREATES (Center for Research in Econometric Analysis of Time Series) (DNRF78), funded by the Danish National Research Foundation.

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