Global bond risk premiums
AbstractThis paper examines time-varying measures of term premiums across ten developed economies. It shows that a single factor accounts for most of the variation in expected excess returns over time, across the maturity spectrum, and across countries. I construct a global return forecasting factor that is a GDP-weighted average of each country’s local return forecasting factor and show that it has information not spanned by the traditional level, slope, curvature factors of the term structure, or by the local return forecasting factors. Including the global forecasting factor in the model produces estimates of spillover effects that are consistent with our conceptual understanding of these flows, both in direction and magnitude. These effects are illustrated for three episodes: the period following the Russian default in 1998, the bond conundrum period from mid-2004 to mid-2006, and the period since the onset of the global financial crisis in 2008.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 499.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-07-02 (All new papers)
- NEP-CBA-2011-07-02 (Central Banking)
- NEP-FMK-2011-07-02 (Financial Markets)
- NEP-FOR-2011-07-02 (Forecasting)
- NEP-IFN-2011-07-02 (International Finance)
- NEP-OPM-2011-07-02 (Open Economy Macroeconomic)
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