An Extension of the Five-factor Affine Term Structure Model: Predicting Future Bond Returns*
- Authors
- Jang, Ga-Young; Kang, Hyoung-Goo; Lee, Dong-Joon
- Issue Date
- Dec-2021
- Publisher
- WILEY
- Keywords
- Affine term structure model; Fixed income asset pricing; Return forecasting
- Citation
- ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES, v.50, no.6, pp.659 - 689
- Indexed
- SSCI
SCOPUS
KCI
- Journal Title
- ASIA-PACIFIC JOURNAL OF FINANCIAL STUDIES
- Volume
- 50
- Number
- 6
- Start Page
- 659
- End Page
- 689
- URI
- https://scholarworks.bwise.kr/hanyang/handle/2021.sw.hanyang/138494
- DOI
- 10.1111/ajfs.12356
- ISSN
- 2041-9945
- Abstract
- We investigate time-varying risk premia in Korean government bonds using a five-factor affine model. The model generates nearly perfectly fitted yields and estimates the bonds' expected returns with more precision than the four-factor model. We also find the statistically significant predictive power of the model for future bond returns using forward rates from cross-sectional and time-series regressions. The predictive power varies in time for bonds with different maturities and reverts to the mean values for short- and long-term bonds, while showing a sign of momentum for medium-term bonds. In out-of-sample exercises, the predictive power is even enhanced when volatility increases.
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