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Variants of Consumption-Wealth Ratios and Predictability of U.S. Government Bond Risk Premia: Old is still Gold

Author

Listed:
  • Oguzhan Cepni

    (Central Bank of the Republic of Turkey, Haci Bayram Mah. Istiklal Cad. No:10 06050, Ankara, Turkey)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Mark E. Wohar

    (College of Business Administration, University of Nebraska at Omaha, 6708 Pine Street, Omaha, NE 68182, USA and School of Business and Economics, Loughborough University, Leicestershire, LE11 3TU, UK)

Abstract

This paper compares the ability of alternative consumption-wealth ratios, based on constant parameter (cay), Markov-switching (cayMS ) and time-varying parameter (cayTVP) cointegration estimation of the consumption function, for predicting in- and out-of-sample movements of quarterly excess returns of U.S. government bonds over 1953:Q2 to 2015:Q3. Our findings show that after controlling for standard financial and macroeconomic factors, cay outperforms the cayMS and cayTVP in predicting the path of excess returns on bonds. Implications of our results for academics, investors and policymakers are discussed.

Suggested Citation

  • Oguzhan Cepni & Rangan Gupta & Mark E. Wohar, 2019. "Variants of Consumption-Wealth Ratios and Predictability of U.S. Government Bond Risk Premia: Old is still Gold," Working Papers 201912, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201912
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    References listed on IDEAS

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    Cited by:

    1. Balcilar, Mehmet & Gupta, Rangan & Sousa, Ricardo M. & Wohar, Mark E., 2021. "Linking U.S. State-level housing market returns, and the consumption-(Dis)Aggregate wealth ratio," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 779-810.
    2. Bouri, Elie & Demirer, Riza & Gupta, Rangan & Wohar, Mark E., 2021. "Gold, platinum and the predictability of bond risk premia," Finance Research Letters, Elsevier, vol. 38(C).
    3. Çepni, Oğuzhan & Guney, I. Ethem & Gupta, Rangan & Wohar, Mark E., 2020. "The role of an aligned investor sentiment index in predicting bond risk premia of the U.S," Journal of Financial Markets, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Bond risk premia; Consumption-wealth ratios; In-sample predictability; Out-of-sample Forecasts;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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