A multivariate latent factor decomposition of international bond yield spreads

Abstract

SUMMARYA factor analysis of long-term bond spreads is performed by decomposing international interest rate spreads into national and global factors. The factors are latent, and are assumed to have GARCH-type speci®cations as well as exhibiting serial dependence. An indirect estimator is used to compute estimates of the unknown parameters. The sampling performance of this estimator is investigated and compared with an alternative direct estimator based on the Kalman predictor. The factor model is applied to weekly data on long-bond spreads between ®ve countries Ð Australia, Japan, Germany, Canada and the UK Ð and the USA over the period 1991 to 1999. The resulting factor decomposition is used to examine the international investor's optimal portfolio decision in a mean-variance framework.

Spillover effects on government bond yields in euro zone. Does full financial integration exist in European government bond markets?

“…bond yields 8 as a proxy for the international risk factor to explain the yield differentials among euro government bonds. Dungey et al (2000) conducted an empirical study to demonstrate that for euro bond markets there is also strong evidence that yield differentials are affected by the presence of the common international factors. In this paper, considering this recent literature, we employ two different international risk factor variables to explain the volatility of the yield differentials.…”

Global yield curve dynamics and interactions: A dynamic Nelson–Siegel approach

“…Our generalized Nelson-Siegel approach is related to, but distinct from, existing work that tends to focus on spreads between domestic bond yields and a "world rate" (e.g., Al Awad and Goodwin, 1998), implicit one-factor analyses based on the international CAPM (e.g., Solnik, 1974Solnik, , 2004Thomas and Wickens, 1993), multi-factor analyses of long bond spreads (e.g., Dungey, Martin and Pagan, 2000), and affine equilibrium analyses (e.g., Brennan and Xia, 2006). Instead we work in a rich environment where each country yield curve is driven by country factors, which in turn are driven both by global and -2-country-specific factors.…”

Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach

“…Our generalized Nelson-Siegel approach is related to, but distinct from, existing work that tends to focus on spreads between domestic bond yields and a "world rate" (e.g., Al Awad and Goodwin, 1998), implicit one-factor analyses based on the international CAPM (e.g., Solnik, 1974Solnik, , 2004Thomas and Wickens, 1993), multi-factor analyses of long bond spreads (e.g., Dungey, Martin and Pagan, 2000), and affine equilibrium analyses (e.g., Brennan and Xia, 2006). Instead we work in a rich environment where -2-each country yield curve is driven by country factors, which in turn are driven both by global and countryspecific factors.…”