Please use this identifier to cite or link to this item: https://scholarbank.nus.edu.sg/handle/10635/170804
Title: VARIANCE RISK PREMIUM AND BOND RETURN PREDICTABILITY
Authors: YIN XIMING
Keywords: Random Field, Term Structure Models, Instantaneous Volatility, Variance Risk Premium, Bond Return Predictability
Issue Date: 30-Mar-2020
Citation: YIN XIMING (2020-03-30). VARIANCE RISK PREMIUM AND BOND RETURN PREDICTABILITY. ScholarBank@NUS Repository.
Abstract: This paper proposes a new way of estimating the risk-neutral volatility of fixed income securities using derivatives data, which can further be used to construct the corresponding yield curve variance risk premium (VRP). After controlling for the shape of yield curves, the VRP strongly predicts one-year holding period excess returns for two-year to ten-year zero coupon bonds. The marginal R^2 of VRP is as high as 40.6%. One standard deviation increase in the VRP is associated with 5.77% increase in the (annualized) bond excess return. This result is robust to controlling for other bond return predictors, including the Cochrane-Piassezi "tent-shaped" factor. Out-of-sample analysis suggests that this predictability is not only statistically signifi cant but can also be translated into economic gains. Additional test suggests that this predictability varies with macroeconomic conditions.
URI: https://scholarbank.nus.edu.sg/handle/10635/170804
Appears in Collections:Ph.D Theses (Open)

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