A1174
Title: Term premium in international yield curves: Role of global and local factors
Authors: Takeshi Kobayashi - NUCB Business School (Japan) [presenting]
Abstract: The aim is to develop a joint model of government yield curves in multiple countries and decompose a term premium into global and local factors. The approach has extended prior study to an arbitrage-free setting, proposing a Global Factor Model in which country yield curves may depend on global-level, slope, and curvature factors as well as country-specific local factors. The results strongly indicate that global yield-level, slope, and curvature factors exist and are economically important, accounting for a significant fraction of variation in country bond yields. Moreover, the global yield factors appear linked to global macroeconomic fundamentals and sentiment factors. The model implied forward term premium is decomposed into global and local factors and level, slope and curvature, and it is shown that global factors have a significant role in explaining "n" time variation of term premium for Germany and the UK while the local part is dominant for Japan. In the low-interest rate period, the curvature factors appear more important in explaining term premium dynamics, especially for the US, Germany, and the UK.
