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Forecasting bond returns using jumps in intraday prices

Forecasting bond returns using jumps in intraday prices

09-07-2011 | Investigación
  • Johan Duyvesteyn
    Johan
    Duyvesteyn
    Senior Quantitative Researcher and Portfolio Manager
  • Martin Martens
    Martin
    Martens
    Head of Quant Allocation Research

Speed read

  • Bond price jumps often coincide with macroeconomic news announcements
  • Jumps are a good market proxy for what investors believe is important news
  • Improved jump measure produces a Sharpe ratio of 0.52

This article1 builds on the work of previous researchers who showed that the average jump mean in bond prices can predict excess bond returns, capturing the countercyclical behavior 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 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.

1Duyvesteyn, J., Martens, M. and Safavi Nic, S., 2011, ‘Forecasting Bond Returns Using Jumps in Intraday Prices’, The Journal of Fixed Income.

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