International Bond Risk Premia

50 Pages Posted: 22 Apr 2011

See all articles by Magnus Dahlquist

Magnus Dahlquist

Stockholm School of Economics; Swedish House of Finance

Henrik Hasseltoft

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 2011

Abstract

We identify local and global factors across international bond markets that are poorly spanned by the traditional level, slope and curvature factors but have strong forecasting power for future bond excess returns. Local and global factors are jointly significant predictors of bond returns, where the global factor is closely linked to US bond risk premia and international business cycles. Motivated by our results, we estimate a no-arbitrage affine term structure model for each country in which movements in risk premia are driven by one local and one global factor. Yield loadings for the two factors are estimated to be close to zero while shocks to risk premia account for a small fraction of yield variance. This suggests that the cross-section of yields conveys little information about the return-forecasting factors. We show that shocks to global risk premia cause off-setting movements in expected returns and expected future short-term interest rates, leaving current yields little affected. Furthermore, correlations between international bond risk premia have increased over time, indicating 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

Dahlquist, Magnus and Hasseltoft, Henrik, International Bond Risk Premia (March 25, 2011). Swiss Finance Institute Research Paper No. 11-16, Available at SSRN: https://ssrn.com/abstract=1813723 or http://dx.doi.org/10.2139/ssrn.1813723

Magnus Dahlquist

Stockholm School of Economics ( email )

Drottninggatan 98
Stockholm, SE-111 60
Sweden

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Henrik Hasseltoft (Contact Author)

affiliation not provided to SSRN

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