How To Make Money in the Bond Market: International Evidence of Inefficiency and What It Suggests about the Way Markets View Monetary Policy

Abstract

M. C. Jensen (1978) describes a market as efficient if it is impossible to make economic profits by trading on the basis of available information. On this criterion, the bond markets of the United States, the United Kingdom, and Germany are all inefficient. Trading rules that switch between bonds and cash on the basis of recursive econometric forecasts of bond price changes are shown to earn rates of return higher than bonds, and comparable to the return on equities, with lower volatility of returns than either. Underlying this inefficiency is an apparent tendency to understate the stabilizing impact of monetary policy. Copyright 1995 by Blackwell Publishers Ltd and The Victoria University of Manchester