Sovereign Risk Premia and Global Macroeconomic Conditions

67 Pages Posted: 2 May 2018 Last revised: 1 Sep 2020

See all articles by Sandro C. Andrade

Sandro C. Andrade

University of Miami - Department of Finance

Adelphe Ekponon

University of Liverpool Management School

Alexandre Jeanneret

UNSW Business School

Date Written: August 31, 2020

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. 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

JEL Classification: F34, G12, G13, G15, G32

Suggested Citation

Andrade, Sandro C. and Ekponon, Adelphe and Jeanneret, Alexandre, Sovereign Risk Premia and Global Macroeconomic Conditions (August 31, 2020). University of Miami Business School Research Paper No. 3162853, Available at SSRN: https://ssrn.com/abstract=3162853 or http://dx.doi.org/10.2139/ssrn.3162853

Sandro C. Andrade

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://moya.bus.miami.edu/~sandrade/

Adelphe Ekponon

University of Liverpool Management School ( email )

HOME PAGE: http://adelpheekponon.com/

Alexandre Jeanneret (Contact Author)

UNSW Business School ( email )

Sydney, NSW 2052
Australia

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