EconPapers    
Economics at your fingertips  
 

Factors of the term structure of sovereign yield spreads

Dennis Wellmann and Stefan Trück
Authors registered in the RePEc Author Service: Stefan Trueck ()

Journal of International Money and Finance, 2018, vol. 81, issue C, 56-75

Abstract: We investigate the term structure of sovereign yield spreads for five advanced economies against the US and provide novel insights on the key drivers of the term structure. We show that the spread term structure dynamics are driven by three latent factors which can be labeled as spread level, slope and curvature similar to common interpretations found in the yield curve literature. We further show that these estimated spread factors have predictive power for exchange rate movements and excess returns, above the predictability of an uncovered interest rate parity approach. As the yield curve contains information about expected future economic conditions we conjecture that these yield spread factors reflect expected macroeconomic differentials which in turn drive exchange rates. Using the information content of yield spread curves may thus be a promising approach to improve the forecasting accuracy of exchange rate models.

Keywords: Sovereign yield spreads; Term structure modeling; Principal component analysis; Macroeconomic fundamentals; Exchange rate forecasts (search for similar items in EconPapers)
JEL-codes: G15 E43 E44 F37 C58 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560617302073
Full text for ScienceDirect subscribers only

Related works:
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:eee:jimfin:v:81:y:2018:i:c:p:56-75

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-03-24
Handle: RePEc:eee:jimfin:v:81:y:2018:i:c:p:56-75