A Factor Analysis Of Bond Risk Premia

Date Added: Jul 2009
Format: PDF

This paper uses the factor augmented regression framework to analyze the relation between bond excess returns and the macro economy. Using a panel of 131 monthly macroeconomic time series for the sample 1964:1-2007:12, the authors estimate 8 static factors by the method of asymptotic principal components. They also use Gibb sampling to estimate dynamic factors from the 131 series reorganized into 8 blocks. Regardless of how the factors are estimated, macroeconomic factors are found to have statistically significant predictive power for excess bond returns. They show how a bias correction to the parameter estimates of factor augmented regressions can be obtained.