Common factors in international bond returns
AbstractIn this paper we estimate and interpret the factors that jointly determine bond returns of different maturities in the US, Germany and Japan.We analyze both currency-hedged and unhedged bond returns.For currency-hedged bond returns, we find that five factors explain 96.5% of the variation of bond returns.These factors can be associated with changes in the level and steepness of the term structures in (some of) these countries.In particular, it turns out that changes in the level of the term structures are correlated across countries, while changes in the steepness of the term structures are country-specific.The five-factor model also provides a good fit of the expected returns of bond returns in all countries.We find similar results for bond returns that are not hedged for currency risk.Finally, we show how the model can be used to calculate the Value at Risk for international bond portfolios and to price cross-currency interest rate derivatives, and compare the results with simpler models.
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Bibliographic InfoPaper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-123825.
Date of creation: 2003
Date of revision:
Publication status: Published in Journal of International Money and Finance (2003) v.22, p.629-656
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Web page: http://www.tilburguniversity.edu/
Other versions of this item:
- Driessen, Joost & Melenberg, Bertrand & Nijman, Theo, 2003. "Common factors in international bond returns," Journal of International Money and Finance, Elsevier, Elsevier, vol. 22(5), pages 629-656, October.
- Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2000. "Common Factors in International Bond Returns," Discussion Paper, Tilburg University, Center for Economic Research 2000-91, Tilburg University, Center for Economic Research.
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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