Out-of-Sample Predictions of Bond Excess Returns and Forward Rates: An Asset-Allocation Perspective

Abstract

This paper investigates the out-of-sample predictability of bond excess returns.We assess the economic value of the forecasting ability of empirical models based on long-term forward interest rates in a dynamic asset allocation strategy.The results show that the information content of forward rates does not generate systematic economic value to investors.Indeed, these models do not outperform the no-predictability benchmark.Furthermore, their relative performance deteriorates over time.

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