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Why do term structures in different currencies co-move?

Listed author(s):
  • Jotikasthira, Chotibhak
  • Le, Anh
  • Lundblad, Christian
Registered author(s):

    Yield curve fluctuations across different currencies are highly correlated. This paper investigates this phenomenon by exploring the channels through which macroeconomic shocks are transmitted across borders. Macroeconomic shocks affect current and expected future short-term rates as central banks react to changing economic environments. Investors could also respond to these shocks by altering their required compensation for risk. Macroeconomic shocks thus influence bond yields both through a policy channel and through a risk compensation channel. Using data from the US, the UK, and Germany, we find that world inflation and US yield level together explain over two-thirds of the covariance of yields at all maturities. Further, these effects operate largely through the risk compensation channel for long-term bonds.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X14001883
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 115 (2015)
    Issue (Month): 1 ()
    Pages: 58-83

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    Handle: RePEc:eee:jfinec:v:115:y:2015:i:1:p:58-83
    DOI: 10.1016/j.jfineco.2014.09.004
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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