Author: Sun Ho Lee(Korea University)

 We study the regime-dependent existence of unspanned macro risks in the Korean government bond market. To this end, we modify the arbitrage-free Nelson-Siegel model of Christensen, Diebold, and Rudebusch (2011) to make three candidate models. In the three models, unspanned macro risks affect the market prices of risks with (i) zero coefficients, (ii) regime-switching coefficients, and (iii) constant non-zero coefficients. Our Bayesian methodology compares them using monthly data of 13 bond maturities and two macro variables (the industrial production index growth rate and inflation). In our sample period of 2001 to 2022, the Bayesian methodology selects Case (ii). Our specification uses a two-state Markov chain, and the unspanned macro risks exist under regime-state two. However, their existence is not statistically significant under state one. During most of the period, the bond market is in regime-state one, but it remains in regime-state two from October 2008 to February 2009. Regarding term premium estimates, unspanned macro risks are also only present during the Global Financial Crisis.