Dissecting the Yield Curve: The International Evidence
63 Pages Posted: 24 Jun 2019 Last revised: 12 Aug 2021
Date Written: June 18, 2019
We develop a term structure model that decomposes nominal yields into the sum of an expectation, term premium, and convexity term, and in turn of their real and inflation counterparts. The model explicitly captures the interrelation between yield factors and macroeconomic conditions while allowing for aggregate stochastic volatility. We extract the components from the nominal and real yield curve of the US, Euro Area, UK, and Japan. We find that the bulk of yield dynamics comes from short rate expectations. Term premia vary over time and increase with maturity, but account for a smaller fraction of yield variance than previously documented. Over time, we observe a sustained decline in short real rate expectations and significant convexity effects. With regard to yield comovement, the US generates the strongest spillovers at the long-end of the yield curve, whereas the Japanese market is the top importer of shocks.
Keywords: Term structure, term premia, yield volatility, macro factors, comovement
JEL Classification: G12, E43, E44, C58
Suggested Citation: Suggested Citation