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Sovereign risk premia and global macroeconomic conditions

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  • Andrade, Sandro C.
  • Ekponon, Adelphe
  • Jeanneret, Alexandre

Abstract

We study how shifting global macroeconomic conditions affect sovereign bond prices. Bondholders earn premia for two sources of systematic risk: exposure to low-frequency changes in the state of the economy, as captured by expected macroeconomic growth and volatility, and exposure to higher-frequency macroeconomic shocks. Our model predicts that the first source, labeled long-run macro risk, is the primary driver of the level and the cross-sectional variation in sovereign bond premia. We find support for this prediction using sovereign bond return data for 43 countries over the 1994–2018 period. A long-short portfolio based on long-run macro risk earns 8.11% per year in our sample.

Suggested Citation

  • Andrade, Sandro C. & Ekponon, Adelphe & Jeanneret, Alexandre, 2023. "Sovereign risk premia and global macroeconomic conditions," Journal of Financial Economics, Elsevier, vol. 147(1), pages 172-197.
    • Handle: RePEc:eee:jfinec:v:147:y:2023:i:1:p:172-197
    DOI: 10.1016/j.jfineco.2022.07.003
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    More about this item

    Keywords

    Sovereign bonds; Risk premium; Consumption-based asset pricing; Credit risk; Macroeconomic conditions;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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