Forecasting Bond Risk Premia Using Technical Analysis

Publication Type

Working Paper

Publication Date

2012

Abstract

While economic variables have been used extensively to forecast the U.S. bond risk premia, little attention has been paid to the use of technical indicators which are widely employed by practitioners. In this paper, we fill this gap by studying the predictive ability of technical indicators vis-a-vis economic variables. We find that technical indicators have significant both in- and out-of-sample forecasting power. In addition, utilizing information from both technical indicators and economic variables increases substantially the forecasting performances relative to using just economic variables and results economically significant utility gains. Moreover, we find that the economic value of the bond risk premia forecasts are only comparable to that of the equity risk premium forecasts, despite the out-of-sample R-squares in the bond market are more than 10 times greater than those in the stock market.

Keywords

bond risk premium predictability, economic variables, technical analysis, moving-average rules, volume, out-of-sample forecasts, principal components

Discipline

Finance and Financial Management

Research Areas

Finance

Identifier

10.2139/ssrn.1914227

Publisher

SSRN

Comments

This paper is selected as one of the Top Ten Paper in Forecasting in SSRN.

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