Predicting Bond Return Predictability

This paper provides empirical evidence on predictable time variations in out-of-sample bond return predictability. Bond predictability is associated with periods of high (low) economic activity (uncertainty), which implies that violations the expectations hypothesis are state dependent and linked to features business cycle. These dependencies predictability, established by introducing a new multivariate test for equal conditional predictive ability, can be used real improve risk premia estimates investors’ utility through novel dynamic forecast combination scheme uses predicted forecasting performance identify best set methods include combined forecast. Dynamically forecasts exhibit strong countercyclical behavior peak during recessions. was accepted Lukas Schmid, finance. Funding: work supported Danish Council Independent Research [Grants DFF 7024–00020B 9033–00003B] Finance Institute. Supplemental Material: The data files online appendices available at https://doi.org/10.1287/mnsc.2023.4713 .