Sovereign bond return prediction with realized higher moments

• Published in: Journal of international financial markets, institutions & money institutions & money, 2019-09, Vol.62, p.53-73
• Main Authors: Kinateder, Harald, Papavassiliou, Vassilios G.
• Format: Article
• Language: English
• Subjects: High-frequency data; Hyper-kurtosis; Hyper-skewness; Out-of-sample prediction; Realized higher moments; Sovereign bond markets
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2019.05.002

•Bond return prediction with realized higher moments and alternative predictors is studied.•Usage of high-frequency data from the European sovereign bond market.•Among higher moments, realized kurtosis is the dominant predictor of subsequent bond returns.•Bond return predictability is stronger during periods of market turmoil.•Bond return predictability is more pronounced for bonds of lower credit ratings. This paper analyzes whether realized higher moments are able to predict out-of-sample sovereign bond returns using high-frequency data from the European bond market. We study bond return predictability over tranquil and crisis periods and across core and periphery markets at the index and country level. We provide fresh evidence that realized kurtosis is the dominant predictor of subsequent returns among higher moments and other predictors such as CDS spreads, short-term interest rates and implied stock market volatility. Our findings further underline that sovereign bond return predictability is stronger during crisis periods and more pronounced for bonds of lower credit ratings.