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March 2018 issue
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Mehrotra
Tölö, Laakkonen, Kalatie
Chiu, Hill
Belongia, Ireland
Fornero, Kirchner
Rose, Spiegel
Abbritti, Dell’Erba, Moreno, Sola
Ihrig, Klee, Li, Wei, Kachovec
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Global Factors in the Term Structure of Interest Rates

by Mirko Abbrittia, Salvatore Dell’Erbab, Antonio Morenoa and Sergio Solab

Abstract

This paper introduces unspanned global factors within a FAVAR framework in a flexible reduced-form affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premiums in advanced economies. In particular, they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant for short-run movements. We uncover a key role for the third principal component of the global term structure in shaping risk-neutral rates and term premium dynamics, especially in the post-2007 period.

JEL Code: C32, E43, F41, G12.

 
Full article (PDF, 39 pages, 4465 kb)


a University of Navarra
b International Monetary Fund