Varying risk premia in international bond markets

Cochrane and Piazzesi [Cochrane, J.H., Piazzesi, M., 2005. Bond risk premia. American Economic Review 95, 138-160] 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. Furthermore, we cannot 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 and outperform alternative approaches. We introduce an alternative specification to forecast future bond returns and achieve superior risk-adjusted returns in our trading strategy. Bayesian model averaging is used to enhance the performance of the proposed trading strategy.