Testing for Chinese bond return predictability

In this study, we investigate whether bond return can be predicted by macroeconomic variables based on the instrumental variable (IVX) based Wald statistics. The IVX-based testing procedure does not have any prior on the degree of persistence of the predicting variables and robustifies inference regardless of the predicting variable being stationary, or have moderate deviation from a unit root, or instead they are near unit root or unit root process. Meanwhile, AIC and BIC are further introduced into the IVX method to select important variables. Monte Caro simulations suggest that they can select the important variables and exclude redundant variable correctly. By analyzing the differences in the long-term and short-term predictability of the bond yields of three different credit ratings for government bonds, AAA and AA-grade corporate bonds, we find 1) The 1-year savings deposit rate, the real effective RMB exchange rate, the Shanghai and Shenzhen 300 index return, and most of the macroeconomic variables combinations can be used to predict the bond return; 2) Long-term predictability of macroeconomic variables is stronger than the short term; 3) Both AIC and BIC can effectively select important variables. © 2019, Editorial Board of Journal of Systems Engineering Society of China. All right reserved.