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International Yield Comovements

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  • Bekaert, Geert
  • Ermolov, Andrey

Abstract

We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition.

Suggested Citation

  • Bekaert, Geert & Ermolov, Andrey, 2023. "International Yield Comovements," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 58(1), pages 250-288, February.
    • Handle: RePEc:cup:jfinqa:v:58:y:2023:i:1:p:250-288_8
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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