Global evidence on unspanned macro risks in dynamic term structure models

Using a large cross-section of 22 countries, we analyze whether macro risks are spanned by the yield curve. Our tests show that macro information, both first and second moments, provides additional explanatory power for bond excess returns beyond yield factors, contrary to the spanned model implications. However, when considering in-sample fit and term premium predictions, distinguishing between spanned and unspanned term structure models makes no difference. These findings are robust across the cross-section of countries. We find the strongest out-of-sample predictive power for second moments of macro information for long-term emerging market bonds.