Predicting government bond returns
The Lux-o-rente fund of Robeco has grown to a size of more than 2.6 billion EUR. The fund offers the diversified return of global government bonds enhanced with market timing based on Robeco’s duration model. The model is able to protect the investor in the fund from negative returns when interest rates rise and to profit even more from declining interest rates.
We continuously monitor the model and ideas to further enhance its predictive power for government bond returns. Over the years academics also have increased their efforts on this topic. As a result several new interesting academic publications on predicting government bond returns have appeared.
At Robeco we are always very critical of academic results. Quite often we could (i) not replicate the results; or (ii) found results not to be robust for the parameter choices; or (iii) not working for other markets; or (iv) the intuition of why it should work is vague at best; or (v) have no added value to the current duration model.
Nevertheless some of the recent academic ideas look really promising. And if they survive a thorough investigation they can find their way into the duration model. Perhaps we can even improve upon the specific ideas. Finally most studies focus on the U.S. government bond market. If the ideas also work for international bond markets the results of the internship are also of great academic interest.
Note that the references below are just examples. The research would start with a review of the literature on the main topic. Then together we will select the most promising ideas to focus our efforts to improve the duration model and the academic knowledge.
Altavilla, Giacomin, Costantini, 2014, Bond Returns and Market Expectations, Journal of Financial Econometrics, 12(4), 708-729.
Eriksen, 2015, Expected Business Conditions and Bond Risk Premia, working paper.
Gargano, Pettenuzzo, Timmermann, 2015, Bond Return Predictability - Economic Value and Links to the Macroeconomy, working paper.
Mylnikov, 2014, Forecasting U.S. Bond Returns: A Practitioner’s Perspective, Journal of Portfolio Management, 40(3), 124-136.
Piazzesi, Salomao, Schneider, 2015, Trend Cycle in Bond Premia, working paper.
Zhu, 2015, Out-of-sample bond risk premium predictions: A global common factor, Journal of International Money and Finance, 51, 155-173.