International Bond Risk Premia
49 Pages Posted: 3 Sep 2010 Last revised: 14 Aug 2015
Date Written: August 13, 2012
We find evidence for time-varying risk premia across international bond markets. Local and global factors jointly predict returns. The global factor is closely linked to US bond risk premia and international business cycles. Movements in the global factor seem to drive risk premia and expected short-term interest rates in opposite directions. We consider an affine term-structure model in which risk premia are driven by one local and one global factor. Shocks to these factors account for only a small fraction of yield variance and the cross-section of yields conveys little information about the factors. Finally, correlations between international bond risk premia have increased over time, suggesting an increase in integration between markets.
Keywords: Affine model, local and global factors, time-varying risk premia
JEL Classification: E43, F31, G12, G15
Suggested Citation: Suggested Citation