Global Bond Risk Premiums

34 Pages Posted: 8 Jun 2011

See all articles by Rebecca Hellerstein

Rebecca Hellerstein

Federal Reserve Bank of New York; Macro Labs

Date Written: June 2011

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: term premium, yield curve, term structure

JEL Classification: F30, E43

Suggested Citation

Hellerstein, Rebecca and Hellerstein, Rebecca, Global Bond Risk Premiums (June 2011). FRB of New York Staff Report No. 499, Available at SSRN: https://ssrn.com/abstract=1859604 or http://dx.doi.org/10.2139/ssrn.1859604

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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