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.
Authors
- Mirko Abbritti
- Salvatore Dell'Erba
- Antonio Moreno
- Sergio Sola
JEL codes
- C32
- E43
- F41
- G12