Bond return predictability: Macro factors and machine learning methods

Author:

Jiang Ying1,Liu Xiaoquan1,Liu Yirong1ORCID,Zhu Fumin2

Affiliation:

1. Nottingham University Business School China University of Nottingham Ningbo Ningbo China

2. College of Economics Shenzhen University Shenzhen China

Abstract

AbstractWe investigate the impact of macroeconomic variables on bond risk premia prediction via machine learning techniques. On the basis of Chinese treasury bonds from March 2006 to December 2022, we show that adding macroeconomic factors improves bond return forecasts and generates higher economic benefits to investors. This is achieved when the nonlinear relationship between macroeconomic variables and bond returns is modelled via machine learning methods. Furthermore, the importance of macroeconomic determinants changes along the yield curve. Our study sheds new light on the information contained in macroeconomic variables for treasury bond valuation and highlights the importance of utilizing appropriate machine learning methods.

Funder

National Natural Science Foundation of China

Humanities and Social Science Fund of Ministry of Education of China

Publisher

Wiley

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