Working Paper: NBER ID: w23480
Authors: Michael D. Bauer; James D. Hamilton
Abstract: A consensus has recently emerged that variables beyond the level, slope, and curvature of the yield curve can help predict bond returns. This paper shows that the statistical tests underlying this evidence are subject to serious small-sample distortions. We propose more robust tests, including a novel bootstrap procedure specifically designed to test the spanning hypothesis. We revisit the analysis in six published studies and find that the evidence against the spanning hypothesis is much weaker than it originally appeared. Our results pose a serious challenge to the prevailing consensus.
Keywords: Bond Returns; Yield Curve; Risk Premia
JEL Codes: C1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| macroeconomic variables (E19) | bond returns (G12) |
| yield curve (E43) | bond returns (G12) |
| predictors (C29) | forecast errors (C53) |
| persistence of predictors (C41) | standard error bias (C46) |
| small sample issues (C83) | evidence against spanning hypothesis (F12) |