Cover; Contents; I. Introduction; II. Data And Motivation; III. A Global Term Structure Model; A. Affine Model; B. Effects of Global Shocks; IV. Estimation Strategy; A. Estimation of the Latent Factors; B. Estimation of the Remaining Parameters; V. Results; A. Estimates of the Global Factors; B. Model Performance; C. How Important are Global Factors for Domestic Factors and Yields?; D. Term Premia Dynamics; E. Global Factors and Term Premium Dynamics; VI. Robustness Checks; VII. Conclusions and Extensions; Tables; 1. Block Exogeneity Test; 2. Model Fit
3. Variance Decomposition -- Domestic Factors4. Variance Decomposition -- Yields; 5. Variance Decomposition -- Term Premia; 6. Variance Decomposition -- Forward and Risk Neutral Rates; 7. Variance Decomposition -- Robustness to Bias Correction; 8. Variance Decomposition -- Term Premia -- Subsample 1990Q1-2007Q2; 9. Variance Decomposition -- Term Premia -- Subsample 1990Q1-2007Q2; Figures; 1. National Yield Curves; 2. National Yield Curves -- First Three Factors; 3. First and Second Global Factors Dynamics; 4. Third Global Factor Dynamics; 5. Global Yield Curve (2007-08)
6. Responses of Local Yield Factors to Global Factors in the UK7. Contribution of Global Shocks to the Yield Curves Dynamics; 8. Term Premia Dynamics; 9. Historical Decomposition: Contribution of Local and Global Shocks to Term; 10. Impulse Responses of the Term Premia to Global Shocks; 11. Contribution of Global Shocks to the Term Premium Dynamics -- Japan; 12. Contribution of Global Shocks to the Term Premium Dynamics -- UK; References
Summary
This paper introduces global factors within a FAVAR framework in an empirical 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 premia 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 to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular
