TITLE:
Common Factors in International Bond Returns and a Joint ATSM to Match Them
AUTHORS:
Christian Gabriel
KEYWORDS:
Affine Term Structure Models, Common Factors, Government Bonds, International Term Structure Models, Principal Component Analysis
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.7,
August
5,
2014
ABSTRACT: The existence of common factors
in international bond markets is an important cause for modelling different
term structures of interest rates jointly. This paper investigates the common
factors of US and UK treasury yields in the period of 1983 to 2012. A principal
component analysis motivates the type of joint ATSM for modelling the yield
curves of two distinct economies. In sum, two common factors explain 85% of the
yield variation and the model factors have a solid economic intuition.