Term Premia Co-movement and Global Trade Network

53 Pages Posted: 12 Aug 2022 Last revised: 9 Oct 2022

See all articles by Ai Jun Hou

Ai Jun Hou

Stockholm University

Caihong Xu

Stockholm University - Stockholm Business School

Xiaoxia Ye

University of Liverpool Management School

Date Written: October 6, 2022

Abstract

We study how the global trade network provides a channel through which term premia comove and transmit across countries. We develop a network term structure model to show why the term premia may decrease with the trade network centrality and conjuncture that the information contained in the trade network can predict the trading partners’ term premium change. We test our theoretical predictions using both trade data and bond yields across different maturities from 37 countries. We find that the links of the global trade network contain useful information in explaining the variations in term premia through time and across countries. Term premia co-movement and transmission are more pronounced among developed countries than developing countries. The theoretical and empirical evidence in this paper indicates the propagation of global and local country shocks transferring in the global macro-economy through the global trade network.

Keywords: Term structure of interest rates, Term premium, Global trade network

JEL Classification: C32, C58, C52

Suggested Citation

Hou, Ai Jun and Xu, Caihong and Ye, Xiaoxia, Term Premia Co-movement and Global Trade Network (October 6, 2022). Available at SSRN: https://ssrn.com/abstract=4182576 or http://dx.doi.org/10.2139/ssrn.4182576

Ai Jun Hou (Contact Author)

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Caihong Xu

Stockholm University - Stockholm Business School ( email )

Roslagsvägen 1010
Stockholm, SE-106 91
Sweden

Xiaoxia Ye

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

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