Global Factors in the Term Structure of Interest Rates
by Mirko Abbrittia, Salvatore Dell’Erbab, Antonio Morenoa and Sergio Solab
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