We undertake a variance decomposition of index-linked bond returns for the US, UK and Iceland. In all cases, news about future excess returns is the key driver though only for Icelandic bonds are returns independent of inflation.

Models based on economic theory have serious problems at forecasting exchange rates better than simple univariate driftless random walk models, especially at short horizons. Multivariate time series models suffer from the same problem. In this paper, we propose to forecast exchange rates with a...