Time-Varying Expected Returns in International Bond Markets



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    • Ilmanen is a vice president at Salomon Brothers, New York. This article is based on my dissertation in the Graduate School of Business at the University of Chicago. I would particularly like to thank my dissertation committee chairmen Eugene Fama and Kenneth French for helpful discussions. I also thank John Cochrane, George Constantinides, Wayne Ferson, Robin Grieves, Campbell Harvey, Doug Huggins, John Huizinga, Johnny Liew, Anthony Lynch, Guillermo Mondino, Rudi Schadt, Boaz Schwartz, René Stulz (the editor), Ingrid Tierens, and an anonymous referee for their comments. I am grateful to the Bank of Finland and Salomon Brothers for providing various data series.


This article examines the predictable variation in long-maturity government bond returns in six countries. A small set of global instruments can forecast 4 to 12 percent of monthly variation in excess bond returns. The predictable variation is statistically and economically significant. Moreover, expected excess bond returns are highly correlated across countries. A model with one global risk factor and constant conditional betas can explain international bond return predictability if the risk factor is proxied by the world excess bond return, but not if it is proxied by the world excess stock return.