In a structural VAR framework, we study the impact of oil price shocks in the global crude oil market on the dynamics of the entire yield curve in four industrialised countries with different positions on the oil market; the US, Canada, Norway, and South Korea. Responses of the term structure factors to oil market shocks are shown to differ contingent on the underlying sources that drive oil price shocks and the country's dependence on oil. Oil market-specific demand shocks result in increases in the level factor in oil-importing countries, but have no such effect in oil-exporting countries. Oil supply disruptions have short-lived negative responses of the slope factors in the US and Canada, associated with loosening monetary policy, whilst demand side shocks tend to lead to increases the slope in all countries. Overall, oil supply and demand shocks jointly account for a considerable amount of the observed variation in the term structure of interest rates.

We study the forecasting power of economic uncertainty about government policy for future bond returns. Using the economic policy uncertainty measure (EPU) developed by Baker, Bloom, and Davis (2016), we investigate its relationship to expected bond returns. The impact of the EPU is shown to be large for earlier maturities at shorter investment horizons. Estimating an affine term structure model incorporating the EPU, we show that term premia estimates from this model with this additional pricing factor exhibit higher fluctuations and move closely with the variations in observed yields. The implied term premia show strong countercyclical movements, hence better explaining higher risk compensation under adverse economic conditions as expected by theory.

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Chen, X. and E. Ghysels (2010). News-good or bad-and its impact on volatility predictions over multiple horizons. The Review of Financial Studies 24(1), 46-81. Clements, M. P. (1997). Evaluating the rationality of fixed-event forecasts.

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