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Forecasting bond returns using jumps in intraday prices

Abstract

28-11-2010 | Research | Johan Duyvesteyn, PhD, CFA, Martin Martens, PhD, Siawash Safavi Nic We build on the work of Wright and Zhou (2009) who show that the average jump mean in bond prices can predict excess bond returns, capturing the countercyclical behaviour of risk premia. We show that these jumps often take place at 8:30 and 10:00 directly linking them to specific macroeconomic news announcements. Mean-reversion, which looks at the total return over the past period rather than just the part related to jumps, has no predictive ability. Hence it is important to consider excess returns that are related to macroeconomic announcements that matter to market participants, and jumps are a good market proxy for what investors believe is important news. Our improved jump measure produces a Sharpe ratio of 0.52 in an out-of-sample market-neutral investment strategy.

This article was published in the Journal of Fixed Income, Spring 2011, Vol. 20, No. 4: pp. 80-90.
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Author

Martin Martens, PhD
Head Quantitative Fixed Income Research


Author

Johan Duyvesteyn, PhD, CFA
Senior Quantitative Researcher and Portfolio Manager