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Modelling sovereign bond yield curves of the US, Japan and Germany

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  • Chi-Sang Tam

    (Market Research Division, Research Department, Hong Kong Monetary Authority, Hong Kong)

  • Ip-Wing Yu

    (Market Research Division, Research Department, Hong Kong Monetary Authority, Hong Kong)

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    Abstract

    The movement of sovereign yields is important for both investment and risk management. This paper applies a method that was first developed by Diebold et al. (2006) to model the sovereign bond yield curves of the US, Japan and Germany. By including observable macroeconomic variables as well as the latent factors of the yield curve, we find evidence of a strong interaction between the yield curve and macro-variables in the US and Germany but not in Japan. We also estimate the dynamic conditional correlations of the latent factors to reveal the cross-country correlations of the bond markets. Copyright © 2007 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/ijfe.353
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

    Volume (Year): 13 (2008)
    Issue (Month): 1 ()
    Pages: 82-91

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    Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:1:p:82-91

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    1. Hordahl, Peter & Tristani, Oreste & Vestin, David, 2006. "A joint econometric model of macroeconomic and term-structure dynamics," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 405-444.
    2. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 555-76, June.
    3. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 309-338.
    4. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
    5. Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2003. "Common factors in international bond returns," Open Access publications from Tilburg University urn:nbn:nl:ui:12-123825, Tilburg University.
    6. Charles L. Evans & David Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series, Federal Reserve Bank of Chicago WP-01-16, Federal Reserve Bank of Chicago.
    7. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
    8. Hafer, R. W. & Kutan, Ali M. & Su Zhou, 1997. "Linkage in EMS term structures: evidence from common trend and transitory components," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(4), pages 595-607, August.
    9. Engsted, Tom & Tanggaard, Carsten, 2007. "The comovement of US and German bond markets," International Review of Financial Analysis, Elsevier, vol. 16(2), pages 172-182.
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    Cited by:
    1. Yusho Kagraoka & Zakaria Moussa, 2010. "Quantitative Easing, Credibility and the Time-Varying Dynamics of the Term Structure of Interest rate in Japan," Working Papers halshs-00543010, HAL.

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