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Extracting global factors from local yield curves

Lauren Stagnol ()

Journal of Asset Management, 2019, vol. 20, issue 5, No 2, 350 pages

Abstract: Abstract Commonalities between major developed countries’ term structures are a stylized fact well documented. However, there is a gap between witnessing cross-linkages and identifying common factors at an international level. In this paper, after making the case for the existence of such phenomenon, we aim at constructing a global risk model using the term structure from major bond-issuing countries from 1997 to 2016, thus incorporating the recent unconventional monetary policies. The goal is twofold: first, this allows quantifying global interest risk (level, slope and curvature), providing insights on global risks at play. Additionally, it helps improving our understanding behind the economic factors driving these global factors. We conclude that such framework allows to replicate stylized facts thoroughly while providing valuable insights on country’s contribution to global yield curve movements, which may be applied to risk appraisal of an international bond portfolio.

Keywords: Yield curve; Sovereign bonds; Term structure; Dynamic factor model (search for similar items in EconPapers)
JEL-codes: C10 E43 G15 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1057/s41260-019-00126-4

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