Predictability in International Financial Markets

30 Pages Posted: 15 Jan 2008

See all articles by Stephan Kessler

Stephan Kessler

Universität St. Gallen - Swiss Institute of Banking and Finance

Bernd Scherer

EDHEC Business School - Department of Economics & Finance

Date Written: November 20, 2007

Abstract

Cochrane and Piazzesi (2005) use forward rates to forecast future bond returns. We extend their approach by applying their model to international bond markets. Our results indicate that the unrestricted Cochrane and Piazzesi (2005) model has a reasonable forecasting power for future bond returns. The restricted model, however, does not perform as well on an international level. Our results do not confirm the systematic tent-shape of the estimated parameters found by Cochrane and Piazzesi (2005). The forecasting models are used to implement various trading strategies. These strategies exhibit high information ratios when implemented in individual countries or on an international level. We also introduce an alternative specification to forecast future bond returns. This alternative specification delivers superior risk-adjusted returns in our trading strategy.

Suggested Citation

Kessler, Stephan and Scherer, Bernd, Predictability in International Financial Markets (November 20, 2007). Available at SSRN: https://ssrn.com/abstract=1083605 or http://dx.doi.org/10.2139/ssrn.1083605

Stephan Kessler (Contact Author)

Universität St. Gallen - Swiss Institute of Banking and Finance ( email )

Rosenbergstr. 52
CH-9000 St.Gallen
Switzerland

Bernd Scherer

EDHEC Business School - Department of Economics & Finance ( email )

France

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