Predicting Excess Bond Returns using Neural Networks

Recent research in financial economics has provided empirical data that suggests that excess returns of Government Bonds can be forecasted using a combination of forward rates and macro-economic factors. A forward rate is the theoretical yield on a bond that is expected to happen in the future. It is calculated by comparing the future expected yield of two bonds. To calculate the forward rate, one uses zero coupon bonds with different maturities. Bond excess returns are positive if the returns on long-term bonds exceed the returns on short-term bonds over this period and negative if the returns on long-term bonds are below the returns on short-term bonds.