Time‐Varying Expected Returns in International Bond Markets

Abstract

This article examines the predictable variation in long-maturity government bond returns in six countries. A small set of global instruments can forecast 4 to 12 percent of monthly variation in excess bond returns. The predictable variation is statistically and economically significant. Moreover, expected excess bond returns are highly correlated across countries. A model with one global risk factor and constant conditional betas can explain international bond return predictability if the risk factor is proxied by the world excess bond return, but not if it is proxied by the world excess stock return.

Dynamics of bond market integration between established and accession European Union countries

“…For this reason, recent studies have allowed integration to vary over time and with events (e.g., Aggarwal et al, 2003;Barr and Priestley, 2004;Bekaert and Harvey, 1995). For government bonds, Ilmanen (1995) provided one of the first assessments on time varying expected returns using an asset pricing model. Extending from this, Barr and Priestley (2004) applied a similar framework to assess international bond market integration.…”

European business cycles and stock return predictability

“…By using log changes, we remove the trend from LEI. More importantly, relative changes in economic conditions can better capture investors' relative risk aversion, as emphasized by Ilmanen (1995).…”

“…For instance, Harvey (1991), Ilmanen (1995), and Zhou and Zhu (2014) find that global instruments are better predictors than local instruments in international financial markets.…”

Volatility spillovers and dynamic correlation in European bond markets

“…While most of the previous studies have focused on the interaction between a single pair of countries, we investigate the influence of two major market factors, regional and world, to both Euro and non-Euro area national bond markets within the European region. Secondly, this study focuses on the relationships between bond markets that, relative to equity markets, are less-studied in the literature (see Ilmanen, 1995;Clare and Lekkos, 2000;Driessen et al, 2003). Thirdly, most approaches for modeling volatility spillovers assume conditional time-invariant correlations in order to simplify the estimation procedure (see Booth et al, 1997;Laopodis, 2002;Miyakoshi, 2003).…”