I have some work to do on the drivers of government bond spreads - ie. across terms (not across governments) of the yield curve, say 5yr and 20yr bond spreads from the same government issuer - and am having a bit of conceptual difficulty with this.
I have done some reading and get a sense that potential drivers could be: credit risk (measured by Credit default swap (CDS) rates); liquidity risk (measured by bid-ask apreads); risk aversion; crisis-period variable (a indicator variable assigned a value 1 during the latest financial crisis);
Should I just take the difference of these variables (and assume the differencing renders the variables stationary) and then run OLS regression of the bond spreads on the drivers?
Are there better ways to go about this? Would PCA have any application here?
Thanks in advance for any advice