Forecasting Government Bond Risk Premia Using Technical Indicators

While economic variables have been used extensively to forecast the U.S. bond risk premia, little attention has been paid to the use of technical indicators which are widely employed by practitioners. In this paper, we fill this gap by studying the predictive ability of using a variety of technical indicators vis-á-vis the economic variables. We find that the technical indicators have significant both inand out-of-sample forecasting power, and utilizing information from both technical indicators and economic variables increases the substantially the forecasting performances relative to using just economic variables. Moreover, we find that the economic value of the bond risk premia forecasts are only comparable to that of the equity risk premium forecasts, despite the R2s in the bond market are more than 10 times greater than those in the stock market. JEL classifications: C53, C58, G11, G12, G17