Harvesting The Term Premium: International Out-of-Sample Evidence

The existing evidence for predictability of international bond risk premia raises questions about whether significant statistical in-sample results can be translated into economic gains. Moreover, limited information is provided for practical applicability of existing findings. This study examines a broad set of existing bond risk premia models, extends it to international markets, and highlights the benefits of using a U.S. forecasting factor for investors. Such an approach, seizing information solely from U.S. markets, better captures drivers in international bond risk premia than other approaches, including country-specific, local information. The out-of-sample findings show how government bond investors can utilize the presented approach to improve their efficiency frontier, although achievable economic gains are rather limited.