Time-varying risk aversion and forecastability of the US term structure of interest rates
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Date
Authors
Bouri, Elie
Gupta, Rangan
Majumdar, Anandamayee
Subramaniam, Sowmya
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
We analyse the out-of-sample forecasting ability of a time-varying metric of risk aversion for the entire term structure of US Treasury securities as reflected by the three latent factors, level, slope and curvature. Daily data cover the out-of-sample period 22nd June 1988 to 3rd September 2020 within a quantiles-based framework. The results show statistically significant forecasting gains emanating from the inclusion of risk aversion for the tails of the conditional distributions of the quantiles-based models of the level, slope and curvature factors. The forecasting gains are shown in lower mean squared forecast errors at horizons of one-day, one-week, and one-month-ahead.
Description
Keywords
Yield curve factors, Risk aversion, Out-of-sample forecasts
Sustainable Development Goals
Citation
Bouri, E., Gupta, R., Majumdar, A. et al. 2021, 'Time-varying risk aversion and forecastability of the US term structure of interest rates', Finance Research Letters, vol. 42, art. 101924, pp. 1-8.