Common factors, principal components analysis, and the term structure of interest rates
This paper studies common factor structure of bond returns from the US, UK and Germany. We estimate factors using both principal components analysis and common principal components analysis (CPCA), and construct factor mimicking portfolios to provide interpretations for some of these factors. A regression analysis of these portfolios shows that the common factors relate mostly to the level and steepness of the term structure in the US, with the first common factor explains approximately 90% of the variation. We use simulations to show that the power of the CPC test statistic to detect similarities in the factor structure which comprises our sample is limited.
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 24 (2012)
Issue (Month): C ()
|Contact details of provider:|| Web page: http://www.elsevier.com/locate/inca/620166|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2003. "Common factors in international bond returns," Other publications TiSEM 06a83942-b625-4d3c-808c-a, Tilburg University, School of Economics and Management.
- Goyal, Amit & Pérignon, Christophe & Villa, Christophe, 2008. "How common are common return factors across the NYSE and Nasdaq?," Journal of Financial Economics, Elsevier, vol. 90(3), pages 252-271, December.
- Babbs, Simon H. & Nowman, K. Ben, 1999. "Kalman Filtering of Generalized Vasicek Term Structure Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(01), pages 115-130, March.
- Bikbov, Ruslan & Chernov, Mikhail, 2010.
"No-arbitrage macroeconomic determinants of the yield curve,"
Journal of Econometrics,
Elsevier, vol. 159(1), pages 166-182, November.
- Ruslan Bikbov & Mikhail Chernov, 2010. "No-arbitrage macroeconomic determinants of the yield curve," Post-Print hal-00732517, HAL.
- Hamilton, James D. & Wu, Jing Cynthia, 2012.
"Identification and estimation of Gaussian affine term structure models,"
Journal of Econometrics,
Elsevier, vol. 168(2), pages 315-331.
- James D. Hamilton & Jing Cynthia Wu, 2012. "Identification and Estimation of Gaussian Affine Term Structure Models," NBER Working Papers 17772, National Bureau of Economic Research, Inc.
- Perignon, Christophe & Smith, Daniel R. & Villa, Christophe, 2007. "Why common factors in international bond returns are not so common," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 284-304, March.
- Pierre Collin-Dufresne & Robert S. Goldstein & Christopher S. Jones, 2008. "Identification of Maximal Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 63(2), pages 743-795, 04.
- Francis X. Diebold & Canlin Li, 2002.
"Forecasting the Term Structure of Government Bond Yields,"
Center for Financial Institutions Working Papers
02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
- Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
- Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
- Driessen, J.J.A.G. & Melenberg, B. & Nijman, T.E., 2000.
"Common Factors in International Bond Returns,"
2000-91, Tilburg University, Center for Economic Research.
- Ruslan Bikbov & Mikhail Chernov, 2011. "Yield Curve and Volatility: Lessons from Eurodollar Futures and Options," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(1), pages 66-105, Winter.
- Robert J. Boik, 2002. "Spectral models for covariance matrices," Biometrika, Biometrika Trust, vol. 89(1), pages 159-182, March.
- repec:hal:journl:peer-00732517 is not listed on IDEAS
- Qiang Dai & Kenneth J. Singleton, 2000. "Specification Analysis of Affine Term Structure Models," Journal of Finance, American Finance Association, vol. 55(5), pages 1943-1978, October.
- Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, vol. 71(1), pages 135-171, January.
- Christophe Villa & Amit Goyal & Christophe Pérignon, 2008. "How common are common return factors across NYSE and Nasdaq?," Post-Print hal-00796909, HAL.
- Egorov, Alexei V. & Li, Haitao & Ng, David, 2011. "A tale of two yield curves: Modeling the joint term structure of dollar and euro interest rates," Journal of Econometrics, Elsevier, vol. 162(1), pages 55-70, May.
- Graciela Boente, 2002. "Influence functions and outlier detection under the common principal components model: A robust approach," Biometrika, Biometrika Trust, vol. 89(4), pages 861-875, December.
- 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.
- Leite, André Luís & Filho, Romeu Braz Pereira Gomes & Vicente, José Valentim Machado, 2010. "Forecasting the yield curve: A statistical model with market survey data," International Review of Financial Analysis, Elsevier, vol. 19(2), pages 108-112, March.
When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:24:y:2012:i:c:p:48-56. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.