Working Paper: NBER ID: w25092
Authors: Robert J. Hodrick; Tuomas Tomunen
Abstract: We examine the Cochrane and Piazzesi (2005, 2008) model in several out-of-sample analyzes. The model's one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currency's term structure, but we reject equality of the coefficients across the two samples. We derive some implications of the model for the predictability of cross-currency investments, but we find little support for these predictions in either pre-2004 or post-2003 data. The model fails to beat historical average returns in recursive out-or-sample forecasting of excess rates of return for bonds and currencies.
Keywords: No keywords provided
JEL Codes: G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Cochrane-Piazzesi (CP) factor (D33) | excess returns on zero-coupon bonds (G12) |
| Cochrane-Piazzesi (CP) factors (D33) | excess returns on uncovered foreign currency investments (G15) |
| one-factor structure (C20) | term structures of additional currencies (F31) |
| Cochrane-Piazzesi (CP) factors (D33) | predictive power in foreign exchange market (F37) |
| recursive out-of-sample predictions (C59) | model performance vs historical averages (C52) |