American Economic Review: Vol. 95 No. 1 (March 2005)
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Bond Risk Premia
Cochrane, John H., and Monika Piazzesi. 2005. "Bond Risk Premia." American Economic Review, 95(1): 138-160.
We study time variation in expected excess bond returns. We run regressions of one-year excess returns on initial forward rates. We find that a single factor, a single tent-shaped linear combination of forward rates, predicts excess returns on one- to five-year maturity bonds with R2 up to 0.44. The return-forecasting factor is countercyclical and forecasts stock returns. An important component of the return-forecasting factor is unrelated to the level, slope, and curvature movements described by most term structure models. We document that measurement errors do not affect our central results.
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Cochrane, John H.