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Variants of consumption‐wealth ratios and predictability of U.S. government bond risk premia
Author(s) -
Çepni Oğuzhan,
Gupta Rangan,
Wohar Mark E.
Publication year - 2021
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12283
Subject(s) - predictability , cointegration , bond , economics , consumption (sociology) , econometrics , consumption function , markov chain , risk premium , sample (material) , monetary economics , mathematics , statistics , fiscal policy , finance , thermodynamics , social science , physics , sociology
This paper compares the ability of alternative consumption‐wealth ratios, based on constant parameter ( cay ), Markov‐switching ( cay MS ), and time‐varying parameter ( cay TVP ) cointegration estimation of the consumption function, for predicting in‐ and out‐of‐sample movements of quarterly excess returns of U.S. government bonds over 1953:Q2 to 2015:Q3. Our findings show that after controlling for standard financial and macroeconomic factors, cay outperforms the cay MS and cay TVP in predicting the path of excess returns on bonds.