Fundamental Economic Variables, Expected Returns, and Bond Fund Performance

Authors

  • EDWIN J. ELTON,

  • MARTIN J. GRUBER,

  • CHRISTOPHER R. BLAKE

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    • Elton and Gruber are from the Leonard N. Stern School of Business, New York University; Blake is from the Graduate School of Business Administration, Fordham University. We would like to thank Stephen Brown, Bent Christensen, Jacob Boudoukh, René Stulz (the editor), an anonymous referee, and participants at the 1994 European Finance Association meetings (Brussels) for helpful comments.


ABSTRACT

In this article, we develop relative pricing (APT) models that are successful in explaining expected returns in the bond market. We utilize indexes as well as unanticipated changes in economic variables as factors driving security returns. An innovation in this article is the measurement of the economic factors as changes in forecasts. The return indexes are the most important variables in explaining the time series of returns. However, the addition of the economic variables leads to a large improvement in the explanation of the cross-section of expected returns. We utilize our relative pricing models to examine the performance of bond funds.

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