Asymmetric Violations of the Spanning Hypothesis

Asymmetric Violations of the Spanning Hypothesis

• Author
• Raul Guarini Riva
• Abstract

• There is a long debate over whether macroeconomic variables help predict bond returns after controlling for yield information. We document that violations of the spanning hypothesis are asymmetric across bond maturities: macroeconomic data is only useful for forecasting bond returns at shorter maturities. To understand this pattern, we provide a new decomposition of bond excess returns in terms of innovations of short-, medium- and long-run factors of the yield curve. We show that macroeconomic variables only help predict the short- and medium-run factors that are relevant for short-maturity bonds. This predictability varies with the business cycle and monetary policy activity.

• Keywords
• Bonds; Forecasting; Spanning Hypothesis; Principal Components
• Subject Area
• Asset pricing, investments, and Derivatives

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