Dissecting the Yield Curve: The International Evidence

67 Pages Posted: 24 Jun 2019 Last revised: 18 Jun 2021

See all articles by Andrea Berardi

Andrea Berardi

Ca Foscari University of Venice - Dipartimento di Economia

Alberto Plazzi

Swiss Finance Institute; Universita' della Svizzera italiana

Date Written: June 18, 2019

Abstract

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

Berardi, Andrea and Plazzi, Alberto, Dissecting the Yield Curve: The International Evidence (June 18, 2019). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Swiss Finance Institute Research Paper No. 19-73, Available at SSRN: https://ssrn.com/abstract=3406156 or http://dx.doi.org/10.2139/ssrn.3406156

Andrea Berardi

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Alberto Plazzi (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

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