Global bond risk premiums

Rebecca Hellerstein

No 499, Staff Reports from Federal Reserve Bank of New York

Abstract: This 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.

Keywords: Bonds; Risk; Forecasting (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-for, nep-ifn and nep-opm
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Citations: View citations in EconPapers (11)

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