Revisiting the Predictability of Bond Risk Premia

This paper investigates the source of predictability of bond risk premia by means of long-term forward interest rates. We show that the predictive ability of forward rates could be due to the high serial correlation and cross-correlation of bond prices. After a simple reparametrization of models used to predict spot rates or excess returns, we …nd that forward rates exhibit much less predictive power than previously recorded. Furthermore, our economic value analysis indicates that there are no economic gains to mean-variance investors who use the predictions of these models in a stylized dynamic asset allocation strategy. JEL classi…cation: G0; G1; E0; E4.