A1051
Title: The importance of the US for international term premiums: The role of uncertainty and economic conditions
Authors: Hossein Asgharian - Lund University (Sweden) [presenting]
Charlotte Christiansen - Aarhus University (Denmark)
Ai Jun Hou - Stockholm University (Sweden)
Caihong Xu - Stockholm University (Sweden)
Abstract: The purpose is to examine the connectedness and volatility spillovers between US and international term premiums and to evaluate the relative importance of the US versus local factors in shaping international term premiums. Long-term bond yields reflect both expected short-term interest rates and the term premium, which compensates investors for risks linked to inflation and interest rate uncertainty, as well as supply-demand dynamics in bond markets. The analysis uses data from the US and seven major developed economies. Term premiums are estimated using a well-established yield curve decomposition method, while connectedness and spillover effects are analyzed through network-based and variance decomposition approaches. A broad set of factors are considered, including both market risk perceptions and structural factors affecting bond market dynamics. Findings indicate that US and international term premiums have become increasingly interconnected over time, with strong US-driven volatility spillover effects. Moreover, US factors, particularly inflation uncertainty, economic conditions, and the supply of government bonds, play a significant role in explaining international term premiums, while local factors have a more limited impact. The contribution lies in providing direct evidence of global term premium transmission channels and highlighting the dominant role of US variables in shaping international bond market dynamics.
