TY - JOUR
AU - Ludvigson,Sydney C.
AU - Ng,Serena
TI - A Factor Analysis of Bond Risk Premia
JF - National Bureau of Economic Research Working Paper Series
VL - No. 15188
PY - 2009
Y2 - July 2009
DO - 10.3386/w15188
UR - http://www.nber.org/papers/w15188
L1 - http://www.nber.org/papers/w15188.pdf
N1 - Author contact info:
Sydney C. Ludvigson
Department of Economics
New York University
19 W. 4th Street, 6th Floor
New York, NY 10002
Tel: 212/998-8927
Fax: 212/995-4186
E-Mail: sydney.ludvigson@nyu.edu
Serena Ng
Department of Economics
Columbia University
440 W. 118 St.
International Affairs Building, MC 3308
New York
NY 10027
Tel: 212-854-5488
E-Mail: serena.ng@columbia.edu
AB - This paper uses the factor augmented regression framework to analyze the relation between bond excess returns and the macro economy. Using a panel of 131 monthly macroeconomic time series for the sample 1964:1-2007:12, we estimate 8 static factors by the method of asymptotic principal components. We also use Gibb sampling to estimate dynamic factors from the 131 series reorganized into 8 blocks. Regardless of how the factors are estimated, macroeconomic factors are found to have statistically significant predictive power for excess bond returns. We show how a bias correction to the parameter estimates of factor augmented regressions can be obtained. This bias is numerically trivial in our application. The predictive power of real activity for excess bond returns is robust even after accounting for finite sample inference problems. Forecasts of excess bond returns (or bond risk premia) are countercyclical. This implies that investors are compensated for risks associated with recessions.
ER -