Multi-level Factor Analysis of Bond Risk Premia

Earlier studies in the finance literature show that macroeconomic fundamentals can predict excess bond returns. We employ a multi-level factor model to estimate global and sectoral factors separately and show that (i)the real factors possess most important predictive power existing in the panel; (ii) the financial factors mighthave some predictive power but less than the real factors; (iii) the inflation factors have almost no predictivepower and (iv) the excess bond returns have a countercyclical component