A1716
Title: Macroeconomic cycles and bond return predictability
Authors: Stefano Soccorsi - Department of Economics, Lancaster University Management School (United Kingdom)
Katerina Tsakou - Swansea University (United Kingdom) [presenting]
Abstract: Motivated by prior evidence that the price of risk varies across frequencies, the predictability of monthly excess bond returns is studied, estimating latent factors generating common macroeconomic cycles of different lengths. The method combines a new band spectrum principal component estimator for frequency-specific factors and supervised learning. Not all macroeconomic cycles are found to predict bond returns in real-time, on the contrary, predictability concentrates only at some bands of frequencies. Two macroeconomic factors are powerful out-of-sample predictors and generate sizeable economic value for investors of various kinds: the first one is obtained by aggregating cycles of at least 8 years related to inflation, and the second one aggregating cycles of 1 to 3 years related to the term spread. The former predictor is relatively more accurate at shorter maturities and during recessions, and the latter is accurate during expansions. Unlike previous works, it is found significant certain equivalent return gains with respect to the expectations hypothesis benchmark using nonoverlapping returns and data available in real-time. The results are in line with models based on countercyclical risk aversion.
