Unspanned Global Macro Risks in Bond Returns

Abstract

This paper examines the macro-spanning hypothesis for bond returns in international markets. Based on a large panel of real-time macro variables that are not subject to revisions, we
find that global macro factors have predictive power for bond returns unspanned by yield factors.
Furthermore, we estimate macro-finance term structure models (MTSMs) with the unspanned
global macro factors and find that the global macro factors influence the market prices of level
and slope risks and induce co-movements in forward term premia in global bond markets.

Keywords: Bond risk premia, global economic factor, real-time macroeconomic factors, return predictability, unspanning puzzle.

JEL Classification: G1, E4, F3