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Working Paper
The empirical failure of the expectations hypothesis of the term structure of bond yields
This paper tests the expectations hypothesis (EH) using US monthly data for bond yields spanning the 1952-2003 sample period and ranging in maturity from 1 month to 10 years. We apply the Lagrange multiplier test developed by Bekaert and Hodrick (2001) and extend it to increase the test power: (a) by introducing economic variables as conditioning information; and (b) by using more than two bond yields in the model and testing the EH jointly on more than one pair of yields. While the conventional bivariate procedure provides mixed results, the more powerful testing procedures suggest rejection ...
Working Paper
Asymptotic Inference for Performance Fees and the Predictability of Asset Returns
In this paper we provide analytical, simulation, and empirical evidence on a test of equal economic value from competing predictive models of asset returns. We define economic value using the concept of a performance fee - the amount an investor would be willing to pay to have access to an alternative predictive model that is used to make investment decisions. We establish that this fee can be asymptotically normal under modest assumptions. Monte Carlo evidence shows that our test can be accurately sized in reasonably large samples. We apply the proposed test to predictions of the US equity ...
Working Paper
Predicting bond excess returns with forward rates: an asset-allocation perspective
This paper revisits the predictability of bond excess returns by means of long-term forward interest rates. We assess the economic value of out-of-sample forecasting ability of empirical models based on forward rates in a dynamic asset allocation strategy. Our results show that the information content of forward rates does not generate any systematic economic value to investors. The performance of the predictive models against the no-predictability benchmark worsens over time and the few positive performance fees recorded from dynamic portfolio strategies based on forward rates are generally ...
Working Paper
Global Drivers of Gross and Net Capital Flows
While prior to the global financial crisis, the empirical international capital flow literature has focused on net capital flows (the current account), since the crisis there has been an increased focus on gross flows. In this paper we jointly analyze global drivers of gross flows (outflows plus inflows) and net flows (outflows minus inflows) by estimating a latent factor model. We find evidence of two global factors, which we call the GFC (global financial cycle) factor and a commodity price factor as they closely track respectively the Miranda-Agrippino and Rey asset price factor and an ...
Working Paper
Federal funds rate prediction
We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a ...
Working Paper
Revisiting the predictability of bond risk premia
This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. After a simple reparametrization of models used to predict spot rates or excess returns, we find that forward rates exhibit much less predictive power than previously recorded. Furthermore, our economic value ...