Asymmetry in government bond returns

•We provide evidence for conditional asymmetry in government bond returns for developed countries.•This finding has important implication for the modeling of government bond returns.•We investigate if asymmetries can be predicted by financial and macroeconomic variables.•Liquidity and past excess returns predict asymmetry with a negative sign.

Is there asymmetry in the distribution of government bond returns in developed countries? Can asymmetries be predicted using financial and macroeconomic variables? To answer the first question, we provide evidence for asymmetry in government bond returns in particular for short maturities. This finding has important implications for modeling and forecasting government bond returns. For example, widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations. To answer the second question, we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign, meaning that the probability of a large and negative excess return is more likely in a less liquid market. In addition, a positive realized return is associated with a negative coefficient of skewness, or a small probability of a large and negative return in the future.