Global Evidence on Unspanned Macro Risks in Dynamic Term Structure Models
64 Pages Posted: 28 May 2021 Last revised: 23 May 2022
Date Written: May 20, 2022
There are mixed results on whether macro risks are spanned by the yield curve. This paper reviews the major arguments and takes a global perspective to obtain comprehensive evidence. We study a large cross-section of 22 countries, including both developed and emerging markets. Our regression evidence confirms that macro information provides explanatory power for bond excess returns on top of yield factors. This finding is particularly strong in emerging markets. However, from a mechanical perspective, discriminating between spanned and unspanned models when considering in-sample fit and term premium predictions makes no difference.
Keywords: Yield curve, Term structure models, Macro-finance, Unspanned macro risks, International markets
JEL Classification: G12, E43, E44
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