International Bond Risk Premia

• Published in: Handbook of Fixed‐Income Securities pp. 169 - 190
• Main Authors: Dahlquist, Magnus, Hasseltoft, Henrik
• Format: Book Chapter
• Language: English
• Published: Hoboken, NJ, USA John Wiley & Sons, Inc 21.03.2016
• Subjects: asset pricing theory; business cycles; conditional bond risk premia; global economic growth; international bond risk premia; time‐varying risk aversion
• ISBN: 9781118709191; 1118709195
• DOI: 10.1002/9781118709207.ch9

The endeavor to understand bond returns and the term structure of interest rates has generated an extensive literature, ranging from papers on return predictability and affine term structure models to theoretical contributions in the form of equilibrium models. While most of the empirical literature focuses on U.S. data, a large body of work applies an international perspective. This chapter reviews the relevant literature while also providing empirical evidence on international bond risk premia and the link to the macroeconomy. It examines conditional bond risk premia by running various predictability regressions and interprets the findings and links international bond risk premia to global economic growth and business cycles. Asset pricing theory suggests that rational variation in risk premia and therefore predictability may arise from either time‐varying economic risks or time‐varying risk aversion among investors. This suggests that future excess returns can be predictable even if markets are efficient.