The Cochrane-Piazzesi Return Forecasting Factor

The Cochrane and Piazzesi (2005, CP) return-forecasting factor is a single, tent-shaped linear combination of forward rates that predicts excess returns on Treasury bonds across all maturities. In my view, the CP factor is truly a pioneering breakthrough in the history of macro-finance term structure models (MTSMs). It also laid the empirical foundation for the Unspanned Macro Risk (UMR) framework pioneered by Duffee (2011) and Joslin, Priebsch, and Singleton (2014), which was a needle in a haystack discovery and serves as a crucial stepping stone toward the eventual complete MTSM.

From CP(2008)