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Forecasting bond returns using jumps in intraday prices

Forecasting bond returns using jumps in intraday prices

28-11-2010 | Investigación

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.

  • Johan Duyvesteyn
    Johan
    Duyvesteyn
    Senior Quantitative Researcher and Portfolio Manager
  • Martin Martens
    Martin
    Martens
    Researcher

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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