Asymmetry in government bond returns

Abstract

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 modelling 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.

Macrofinancial information on the post-COVID-19 economic recovery: Will it be V, U or L-shaped?

“… 4 Two technical remarks are in order. First, the distribution around sovereign spread forecasts from model 2 is symmetric around the baseline forecasts and hence cover a significant area in negative territory, which is an issue for some countries whose spreads have never been negative and can hardly be expected to be significantly negative in the coming years (see also Fujiwara et al., 2013 ). Second, confidence bands around the forecasts generated by model 2 - computed as in Jarociński (2010) - are somewhat narrow for short-term forecasts.…”