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A multivariate latent factor decomposition of international bond yield spreads

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Author Info
Mardi Dungey (Economics Program, Australian National University, Canberra, ACT 0200, Australia)
Vance L Martin (Department of Economics, University of Melbourne, Parkville, Victoria 3052, Australia)
Adrian R Pagan (Economics Program, Australian National University, Canberra, ACT 0200, Australia)

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Abstract

A 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 specifications 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 five countries - Australia, Japan, Germany, Canada and the UK - 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. Copyright © 2000 John Wiley & Sons, Ltd.

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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 15 (2000)
Issue (Month): 6 ()
Pages: 697-715
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Handle: RePEc:jae:japmet:v:15:y:2000:i:6:p:697-715

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  1. Al Awad, Mouawiya & Goodwin, Barry K., 1998. "Dynamic linkages among real interest rates in international capital markets," Journal of International Money and Finance, Elsevier, vol. 17(6), pages 881-907, December. [Downloadable!] (restricted)
  2. Favero, Carlo A & Giavazzi, Francesco & Spaventa, Luigi, 1997. "High Yields: The Spread on German Interest Rates," Economic Journal, Royal Economic Society, vol. 107(443), pages 956-85, July. [Downloadable!] (restricted)
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  3. Mahieu, Ronald & Schotman, Peter, 1994. "Neglected common factors in exchange rate volatility," Journal of Empirical Finance, Elsevier, vol. 1(3-4), pages 279-311, July. [Downloadable!] (restricted)
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  4. Dungey, M.H., 1999. "Decomposing Exchange Rate Volatility Around the Pacific Rim," Papers 99.12, La Trobe - Department of Economics.
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  5. Ng, Victor & Engle, Robert F. & Rothschild, Michael, 1992. "A multi-dynamic-factor model for stock returns," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 245-266. [Downloadable!] (restricted)
  6. Andersen, Torben G. & Lund, Jesper, 1997. "Estimating continuous-time stochastic volatility models of the short-term interest rate," Journal of Econometrics, Elsevier, vol. 77(2), pages 343-377, April. [Downloadable!] (restricted)
  7. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September. [Downloadable!]
  8. Pagan, A.R., 1996. "Simulation Based Estimation of Some Factor Models in Econometrics," Department of Economics - Working Papers Series 521, The University of Melbourne.
  9. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October. [Downloadable!]
  10. Duffie, Darrell & Singleton, Kenneth J, 1993. "Simulated Moments Estimation of Markov Models of Asset Prices," Econometrica, Econometric Society, vol. 61(4), pages 929-52, July. [Downloadable!] (restricted)
  11. Gourieroux, C & Monfort, A & Renault, E, 1993. "Indirect Inference," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S85-118, Suppl. De. [Downloadable!] (restricted)
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  12. Sebastian Edwards, 1986. "The Pricing of Bonds and Bank Loans in International Markets: An Empirical Analysis of Developing Countries' Foreign Borrowing," NBER Working Papers 1689, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Allan W. Gregory & David G. Watt, 1995. "Sources of Variation in International Real Interest Rates," Working Papers 923, Queen's University, Department of Economics.
  14. Caporale, Guglielmo Maria & Kalyvitis, Sarantis & Pittis, Nikitas, 1996. "Interest rate convergence, capital controls, risk premia and foreign exchange market efficiency in the EMS," Journal of Macroeconomics, Elsevier, vol. 18(4), pages 693-714. [Downloadable!] (restricted)
  15. Gallant, A. Ronald & Tauchen, George, 1997. "Reprojecting Partially Observed Systems with Application to Interest Rate Diffusions," Working Papers 97-09, Duke University, Department of Economics.
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  17. Howard Howe & Charles Pigott, 1991. "Determinants of long-term interest rates: an empirical study of several industrial countries," Quarterly Review, Federal Reserve Bank of New York, issue Win, pages 12-28.
  18. repec:cup:etheor:v:12:y:1996:i:4:p:657-81 is not listed on IDEAS
  19. Tauchen, George E. & Gallant, A. Ronald, 1995. "Which Moments to Match," Working Papers 95-20, Duke University, Department of Economics.
  20. Pagan, A.R. & Hall, A.D. & Martin, V., 1995. "Modelling the Term Structure," Papers 284, Australian National University - Department of Economics.
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