A factor analysis of bond risk premia
Author | : Sydney C. Ludvigson |
Publisher | : |
Total Pages | : 28 |
Release | : 2009 |
ISBN-10 | : OCLC:429226409 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book A factor analysis of bond risk premia written by Sydney C. Ludvigson and published by . This book was released on 2009 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses the factor augmented regression framework to analyze the relation between bond excess returns and the macro economy. Using a panel of 131 monthly macroeconomic time series for the sample 1964:1-2007:12, we estimate 8 static factors by the method of asymptotic principal components. We also use Gibb sampling to estimate dynamic factors from the 131 series reorganized into 8 blocks. Regardless of how the factors are estimated, macroeconomic factors are found to have statistically significant predictive power for excess bond returns. We show how a bias correction to the parameter estimates of factor augmented regressions can be obtained. This bias is numerically trivial in our application. The predictive power of real activity for excess bond returns is robust even after accounting for finite sample inference problems. Forecasts of excess bond returns (or bond risk premia) are countercyclical. This implies that investors are compensated for risks associated with recessions.