Robust Bond Risk Premia. (22nd September 2017)

• Record Type: Journal Article
• Authors: Bauer, Michael D.; Hamilton, James D.
• Is Part Of: Review of financial studies. Volume 31:Number 2(2018)
• Page Start: 399
• Page End: 448
• Publication Date: 2017-09-22
• Subjects: Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhx096
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract : A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus. Received January 21, 2016; editorial decision May 30, 2017 by Editor Stijn Van Nieuwerburgh.