Economic Relevance of Hidden Factors in International Bond Risk Premia
Tiozzo Pezzoli, Luca (2014-12), Economic Relevance of Hidden Factors in International Bond Risk Premia, 12th International Paris Finance Meeting - Paris December 2014 Finance Meeting, 2014-12, Paris, France
TypeCommunication / Conférence
Conference title12th International Paris Finance Meeting - Paris December 2014 Finance Meeting
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Author(s)Tiozzo Pezzoli, Luca
Abstract (EN)This paper investigates the relevance of hidden factors in international bond risk premia to forecast future excess bond returns and macroeconomic variables such as economic growth and ination rate. Using maximum likelihood estimation of a linear Gaussian state-space model, adopted to explain the dynamics of expected excess bond returns of a given country, associated selection criteria detect as relevant, factors otherwise judged negligible by the classical explained variance approach adopted by Cochrane and Piazzesi (2005) and Cochrane and Piazzesi (2008). We call these factors hidden, meaning that they are not visible through the lens of a principal component analysis of expected excess bond returns. We find that these hidden factors are useful predictors of both future economic growth and ination rate given that they add forecasting power over and above the information contained both in the Cochrane and Piazzesi (2008) and in yield curve factors. These empirical findings are robust across different sample periods and countries as well as with respect to the interpolation technique used in the construction of the international bond yield data sets.
Subjects / KeywordsFinancial econometrics; Interest rates; International finance
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