Which Mechanism Prices the Yield Curve? Expectations Versus Risk Compensation in Emerging-Market Sovereign Yields

Abstract

Abstract—Long-term sovereign yields are routinely read as signals of monetary-policy expectations, although an observed yield cannot reveal whether its movement reflects a revision in expected future short rates or a change in the compensation demanded for bearing risk. This paper develops a focused systematic and theory-building review of the no-arbitrage term-structure literature together with adjacent evidence on monetary transmission, emerging-market credit risk, fiscal expectations, institutional credibility, market structure, political uncertainty, and the global financial cycle. Evidence is separated into two streams: a core decomposition corpus, which can testify about the components themselves, and a contextual mechanism map, which can only explain their variation. The protocol identifies 138 records and retains 44 studies, 33 in the decomposition stream and 11 in the mechanism stream. It is reported together with a documented pilot calibration: requiring a pricing-theory conjunct was found to exclude emerging-market decomposition studies whose abstracts do not use no-arbitrage vocabulary, and the string was restructured into two strands accordingly. The synthesis reframes the emerging-market term premium as broad risk compensation rather than pure duration compensation, since recent evidence separates expected short rates, a clean term premium, and sovereign credit risk. The resulting gap is one of attribution and integration rather than absence: the literature decomposes yields and explains premium variation but does not classify which component dominates a given movement, and has not asked whether a political transition changes the mechanism pricing an emerging-market local-currency curve. The paper proposes a Yield Dominance Index mapping an Adrian–Crump–Moench decomposition into expectation-dominant, premium-dominant, and contested states, followed by an attribution stage over monetary, fiscal-institutional, market-structure, and global blocks. The contribution is interpretive rather than a new estimator.

Keywords—Sovereign yield curve; term premium; affine term structure; economic attribution; political transition; fiscal expectations; emerging markets.