Risk and return in the bond markets: Past developments and future prospects

Arbeitspapier

The paper examines the past risk and return trade-off on the US bond market, and uses this as a basis for developing a flexible tool based on simulation of principal components to evaluate future prospects for risk and returns for investors. The principal components of the yield curve are related to a few main macro-economic drivers (inflation and real GDP-gap). This allows simulation of yields curves based on expectations about the future behaviour of the macro-economic drivers, rather than relying solely on parameters estimated from historic data. The overall conclusion is that since 1960 the US-bond market has rewarded risk in the sense that more volatile bond returns has been associated with higher average realized returns. However, this covers very large variation over sub-periods, and in periods with increasing yield trend extra risk has not always been rewarded. In the simulations of the future risk-return trade-off, there are lower excess returns from enhancing the duration exposure in the future relative to the near past. However, the risk associated with duration enhancing is also lower.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Danmarks Nationalbank Working Papers ; No. 40

Classification and Topics

• Classification: Wirtschaft

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Andersen, Allan Bødskov ; Hansen, Jakob Lage
• Event: Veröffentlichung
• (who): Danmarks Nationalbank
• (where): Copenhagen
• (when): 2006

Further information

• Handle: http://hdl.handle.net/10419/82345
• Last update: 10.03.2025, 11:43 AM CET