International Bond Risk Premia

Magnus Dahlquist and Henrik Hasseltoft
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Magnus Dahlquist: Stockholm School of Economics and SIFR
Henrik Hasseltoft: University of Zurich and Swiss Finance Institute

No 11-16, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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 (search for similar items in EconPapers)
JEL-codes: E43 F31 G12 G15 (search for similar items in EconPapers)
Date: 2011-03
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1116

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