Sovereign risk premia and global macroeconomic conditions

Sandro C. Andrade, Adelphe Ekponon and Alexandre Jeanneret

Journal of Financial Economics, 2023, vol. 147, issue 1, 172-197

Abstract: We study how shifting global macroeconomic conditions affect sovereign bond prices. Bondholders earn premia for two sources of systematic risk: exposure to low-frequency changes in the state of the economy, as captured by expected macroeconomic growth and volatility, and exposure to higher-frequency macroeconomic shocks. Our model predicts that the first source, labeled long-run macro risk, is the primary driver of the level and the cross-sectional variation in sovereign bond premia. We find support for this prediction using sovereign bond return data for 43 countries over the 1994–2018 period. A long-short portfolio based on long-run macro risk earns 8.11% per year in our sample.

Keywords: Sovereign bonds; Risk premium; Consumption-based asset pricing; Credit risk; Macroeconomic conditions (search for similar items in EconPapers)
JEL-codes: F34 G12 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:147:y:2023:i:1:p:172-197

DOI: 10.1016/j.jfineco.2022.07.003

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