An investigation of bond term premia in international government bond indices

Abstract

In this study we use the monthly excess holding period yields (EHPY), and their volatility for five government bond indices markets, in order to test the popular expectations theory of the term structure and to assess whether there are patterns in risk premia, which are common across these markets. For this reason, a GARCH-M model is used. The empirical results derived indicate that in most cases the Expectation Hypothesis is rejected and short medium-term government bond yields display serial correlation and co movement in the majority of the countries. Additionally, the term premia at the long end of the maturity structure are time varying in the USA, the UK and Canada. The risk factor is statistically significant as an explanatory variable for risk premia, only for 7 years maturity bonds in the USA and the UK. © 2005 Elsevier B.V. All rights reserved.