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A Global Model Of International Yield Curves: No‐Arbitrage Term Structure Approach

Author

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  • Iryna Kaminska
  • Andrew Meldrum
  • James Smith

Abstract

This paper extends a popular no-arbitrage affine term structure model to model jointly bond markets and exchange rates across the United Kingdom, United States and euro area. Using a monthly data set of forward rates from 1992, we first demonstrate that two global factors account for a significant proportion in the variation of bond yields across countries. We also show that, in order to explain country-specific movements in yield curves, local factors are required. Although we implement a very general factor structure, we find that our global factors are related to global inflation and global economic activity, while local factors are closely linked to monetary policy rates. In this respect our results are similar to previous work. But an important advantage of our joint international model is that we are able to decompose interest rates into risk-free rates and risk premia. Additionally, we are able to study the implications for exchange rates. We show that while differences in risk-free rates matter, to a large extent changes in the exchange rate are determined by time-varying exchange rate risk premia.
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Suggested Citation

  • Iryna Kaminska & Andrew Meldrum & James Smith, 2013. "A Global Model Of International Yield Curves: No‐Arbitrage Term Structure Approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 18(4), pages 352-374, October.
    • Handle: RePEc:wly:ijfiec:v:18:y:2013:i:4:p:352-374
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    File URL: http://hdl.handle.net/10.1002/ijfe.1468
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    Cited by:

    1. Mikhail Chernov & Drew Creal, 2023. "International Yield Curves and Currency Puzzles," Journal of Finance, American Finance Association, vol. 78(1), pages 209-245, February.
    2. Ioannis A. Venetis & Avgoustinos Ladas, 2023. "Co-movement and global factors in sovereign bond yields," Bulletin of Applied Economics, Risk Market Journals, vol. 10(2), pages 17-45.
    3. Andrew Meldrum & Marek Raczko & Peter Spencer, 2016. "Overseas unspanned factors and domestic bond returns," Bank of England working papers 618, Bank of England.
    4. Perekunah Bright Eregha & Festus O. Egwaikhide, 2018. "Globalization and monetary policy rule in West African Monetary Zone: A generalized method of moment approach," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 49, pages 57-66.
    5. repec:ecb:ecbwps:20141798 is not listed on IDEAS
    6. Carvalho, Daniel & Fidora, Michael, 2015. "Capital inflows and euro area long-term interest rates," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 186-204.
    7. Ana Aguilar & María Diego-Fernández & Rocio Elizondo & Jessica Roldán-Peña, 2022. "Term premium dynamics and its determinants: the Mexican case," BIS Working Papers 993, Bank for International Settlements.
    8. Aguilar-Argaez Ana María & Diego-Fernández Forseck María & Elizondo Rocío & Roldán-Peña Jessica, 2020. "Term Premium Dynamics and its Determinants: The Mexican Case," Working Papers 2020-18, Banco de México.
    9. Meldrum, Andrew & Raczko, Marek & Spencer, Peter, 2023. "The information in joint term structures of bond yields," Journal of International Money and Finance, Elsevier, vol. 134(C).
    10. Don H. Kim & Marcelo Ochoa, 2021. "International Yield Spillovers," Finance and Economics Discussion Series 2021-001, Board of Governors of the Federal Reserve System (U.S.).
    11. Jonathan Hambur & Lynne Cockerell & Christopher Potter & Penelope Smith & Michelle Wright, 2015. "Modelling the Australian Dollar," RBA Research Discussion Papers rdp2015-12, Reserve Bank of Australia.

    More about this item

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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