Why do term structures in different currencies co-move?

Chotibhak Jotikasthira, Anh Le and Christian Lundblad

Journal of Financial Economics, 2015, vol. 115, issue 1, 58-83

Abstract: 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.

Keywords: Macro-finance term structure model; Interest rates; Cross-country co-movement (search for similar items in EconPapers)
JEL-codes: C58 E43 G12 G15 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (84)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:115:y:2015:i:1:p:58-83

DOI: 10.1016/j.jfineco.2014.09.004

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