Time-varying risk aversion and the predictability of bond premia

We show that time-varying risk aversion captures significant predictive information over excess returns on U.S. government bonds even after controlling for a large number of financial and macro factors. Including risk aversion improves the predictive accuracy at all horizons (one- to twelve-months ahead) for shorter maturity bonds and at shorter forecast horizons (one- to three-months ahead) for longer maturity bonds. Given the role of Treasury securities in economic forecasting models and portfolio allocation decisions, our findings have significant implications for investors, policymakers and researchers interested in accurately forecasting return dynamics for these assets.