The Predictability of Excess Returns on UK Bonds: a Non-Linear Approach
This paper provides an empirical description of the behaviour of excess returns on UK government discount bonds interms of risk factors such as the forward premium, the slope of the term structure, dividend yields and excess stockreturns. We identify the existence of a time-varying term structure of expected excess returns. Further, the dynamicsof the expected returns are characterised by regime-switching behaviour where the transition from one regime to theother is controlled by the slope of the term structure of interest rates. The first regime, which is characterised by flator downward sloping term structures, occurs during periods of economic recession. The second regime, which ischaracterised by upward sloping term structures, occurs during periods of economic expansion. The main risk factorsexplaining expected returns are the slope of the term structure in the recessionary regime and the excess stock returnsin the expansionary regime.
Year of publication: |
2001
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Authors: | Lekkos, I ; Costas, M |
Publisher: |
Brunel University |
Subject: | Interest rates | Excess returns | Smooth transition | Regime -Switching models |
Saved in:
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