A Workflow for Forecasting Bond Returns with Econometric Models

Summary

The document responds to a broad request for a practical starting point for forecasting European government or other bond prices from historical data. Its central modeling recommendation is to forecast bond returns rather than prices directly. It then outlines an iterative research process: review relevant literature, identify factors that may influence bond returns, collect data, build or refine an econometric model, and test that model.

The answer does not supply a specific forecasting specification, paper details, data sources, or implementation steps. It also does not discuss bond cash flows, yield changes, duration, credit risk, or how to evaluate forecasts against a benchmark. The proposed workflow is therefore a general research roadmap rather than a ready-made pricing model; the appropriate explanatory variables and testing approach depend on the bonds and data being studied.

Key ideas

• Modeling bond returns is recommended over modeling bond prices directly.
• Begin by reviewing literature and forming hypotheses about drivers of bond returns.
• Collect relevant data before building or refining an econometric model.
• Test the model and iterate on the literature, hypotheses, data, or specification.
• The answer provides a broad workflow rather than a specific forecasting method.

Tags

# How to forecast bond price with time series


# How to forecast bond price with time series












I have the goal of being able to develop a model that can forecast the future prices of european government bond (or other private bonds), particularly from the historical prices and returns of the bonds. However I do not know really how to start. In fact I have just graduated in quantitative finance course, but I never deepened so the thing to be able to develop a model. Someone has advices to know how to start? Maybe simply pointing some papers dealing with the subject. I would use something to not only theoretical, but that explains step by step how to build the model. I conclude by saying that I know well enough `R` and `C` language, so I might even consider a model based on monte carlo simulation for example.

## Answer by Bob Jansen (score 2, accepted)

https://quant.stackexchange.com/a/17141

This is a very broad question and a large number of issues have been discussed in the literature. As such, it's hard to give specific advice except that it is better to model returns instead of prices directly. What I would do if I were you:

- Read some of the available literature to get a good overview. This is an interesting paper but many more exist.

- Theorize on what influences bond returns

- Gather data

- Build/Improve an econometric model

- Test this model

- Go back to step 1, 2, 3 or 4.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.