The Abnormal Performance of Bond Returns

This article studies the link between the predictability of futures returns and the business cycle. Modelling the relationship between the variation through time in expected futures returns and economic activity should give us some insight as to whether the predictable movements in futures returns result from rational variation in the returns required by investors over time. With this in mind, the paper investigates three hypotheses that are consistent with weak-form market efficiency. First, it tests whether the time-varying risk premia identified in futures markets move in tandem. Second, it examines if the information variables predict futures returns because of their ability to proxy for change in the business cycle. Third, it analyses whether the pattern of forecastability in futures markets is consistent with the evidence from the stock and bond markets and with traditional theoretical explanations of the trade-off between risk and expected returns.