Are Bond Returns Predictable with Real-Time Macro Data?

50 Pages Posted: 23 Jan 2018 Last revised: 1 Feb 2021

See all articles by Dashan Huang

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business

Fuwei Jiang

Central University of Finance and Economics (CUFE)

Kunpeng Li

Capital University of Economics and Business

Guoshi Tong

Renmin University

Guofu Zhou

Washington University in St. Louis - John M. Olin Business School

Date Written: April 30, 2020

Abstract

We examine whether bond returns are predictable with real-time macro variables by using two supervised learning methods, scaled PCA (sPCA) and partial least squares (PLS) instead of the usual PCA. We find that the real-time sPCA and PLS factors can predict bond returns significantly both in- and out-of-sample, re-affirming recent studies on time-varying risk premia. We also find that the predictability is countercyclical and it yields substantial economic values to a mean-variance investor. Econometrically, we study the properties of the sPCA and PLS in a partially-relevant latent factor framework, providing insights on why they can extract relevant factors that contain predictive information about the target, and on conditions under which they can complement each other.

Keywords: Bond Return Predictability, Real Time Macro Data, Vintage, PCA, Big Data, Machine Learning

JEL Classification: C22, C53, G11, G12, G17

Suggested Citation

Huang, Dashan and Jiang, Fuwei and Li, Kunpeng and Tong, Guoshi and Zhou, Guofu, Are Bond Returns Predictable with Real-Time Macro Data? (April 30, 2020). Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=3107612 or http://dx.doi.org/10.2139/ssrn.3107612

Dashan Huang

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore

HOME PAGE: http://dashanhuang.weebly.com/

Fuwei Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Kunpeng Li

Capital University of Economics and Business ( email )

Zhangjialukou 121, Huaxiang
Fengtai district
Beijing, 100070
China

Guoshi Tong

Renmin University ( email )

59 Zhongguancun Street
Beijing, 100872
China

Guofu Zhou (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

Washington University
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-6384 (Phone)
314-658-6359 (Fax)

HOME PAGE: http://apps.olin.wustl.edu/faculty/zhou/

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