A global model of international yield curves: no-arbitrage term structure approach

Iryna Kaminska, Andrew Meldrum and James Smith ()
Additional contact information
James Smith: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH

No 419, Bank of England working papers from Bank of England

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.

Keywords: Term structure models; exchange rates. (search for similar items in EconPapers)
JEL-codes: C33 E43 F31 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-04-12
New Economics Papers: this item is included in nep-cba, nep-eec and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... ructure-approach.pdf Full text (application/pdf)

Related works:
Journal Article: A GLOBAL MODEL OF INTERNATIONAL YIELD CURVES: NO‐ARBITRAGE TERM STRUCTURE APPROACH (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0419

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().