Term premium in emerging market sovereign yields: Role of common and country specific factors

Özet

This paper provides cross-country analysis of local bond market term premia in emerging countries. Inorder to investigate the role of domestic and global factors in the determination of compensationdemanded by investors for their medium and long term fixed income investments, term premia iscomputed for emerging countries by using methodology adopted in Adrian et al. (2013). It is found thatchanges in market liquidity conditions is important for the variation in term premia. Moreover, movements in domestic and global factors are closely linked to term premia. In this regard, uncertainty relatedeconomic surprise indicator and exchange rate related expectations subsume some part of the expectedexcess returns in both medium and long term. Among other explanatory variables, inflation uncertaintyis the only variable found to be insignificant in medium term, albeit it has an explaining power in thelong term.