Please use this identifier to cite or link to this item: http://buratest.brunel.ac.uk/handle/2438/886
Title: The Predictability of Excess Returns on UK Bonds: a Non-Linear Approach
Authors: Lekkos, I
Costas, M
Keywords: Interest rates; Excess returns; Smooth transition; Regime -Switching models.
Issue Date: 2001
Publisher: Brunel University
Citation: Economics and Finance Working papers, Brunel University, 01-11
Abstract: This paper provides an empirical description of the behaviour of excess returns on UK government discount bonds in terms of risk factors such as the forward premium, the slope of the term structure, dividend yields and excess stock returns. We identify the existence of a time-varying term structure of expected excess returns. Further, the dynamics of the expected returns are characterised by regime-switching behaviour where the transition from one regime to the other is controlled by the slope of the term structure of interest rates. The first regime, which is characterised by flat or downward sloping term structures, occurs during periods of economic recession. The second regime, which is characterised by upward sloping term structures, occurs during periods of economic expansion. The main risk factors explaining expected returns are the slope of the term structure in the recessionary regime and the excess stock returns in the expansionary regime.
URI: http://bura.brunel.ac.uk/handle/2438/886
Appears in Collections:Dept of Economics and Finance Research Papers

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