IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Sign switching behavior of cross-county interest rate correlations: Theory and Evidence

Listed author(s):
  • Dong-Hyun Ahn
  • In Seok Baek
  • A. Ronald Gallant

This paper considers the well established empirical fact that conditional correlations among cross-country interest rates switch signs. Switching implies an alternation of coupling and decoupling of global bond markets over time. This evidence is robust to alternative estimation schemes. Here we use a seminonparametric (SNP) model with a BEKK-GARCH variance function to estimate conditional second moments both to confirm these results and to provide auxiliary models for structural estimation of term structure models. Using an extensive historical analysis, we find that major driving forces behind the sign-switching behavior of conditional correlations between the Eurodollar rate and the Euroyen rate are synchronization and dis-synchronization of business cycles and coordination and discoordination of monetary policies triggered by international policies and financial market crashes. Especially, we find that the two interest rates are more likely to couple when both the U.S. and Japan slip into a recesion while the likelihood of decoupling is highest when both economies are in expansion. We also explore whether proposed International Affine Term Structure Models (IATSMs) and International Quadratic Term Structure Models (IQTSMs) are able to reproduce the sign-switching behavior of conditional correlations among crosscountry interest rates. We find that a small subset of the IATSMs can generate sign-switching behavior but only by forgoing their ability to describe other features such as the positivity of nominal interest rates, heteroskedasticity in volatility, and correlations among underlying state variables. In contrast, the IQTSMs are able to generate it without limiting their ability to describe other dynamic features. Using the MCMC-Efficient Method of Moments (EMM), we test the empirical performance of the models in reproducing the sign-switching behavior of conditional correlations. The result suggests that the IATSMs conclusively fail to capture it while the IQTSMs are relatively successful but fail to reproduce ephemeral ones.

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.

File URL:
File Function: main text
Download Restriction: no

Paper provided by Duke University, Department of Economics in its series Working Papers with number 10-58.

in new window

Length: 88
Date of creation: 2010
Handle: RePEc:duk:dukeec:10-58
Contact details of provider: Postal:
Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097

Phone: (919) 660-1800
Fax: (919) 684-8974
Web page:

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:duk:dukeec:10-58. 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: (Department of Economics Webmaster)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.