Co-Movement, Spillovers and Excess Returns in Global Bond Markets

Joseph Byrne, Shuo Cao and Dimitris Korobilis

No 2015-75, SIRE Discussion Papers from Scottish Institute for Research in Economics (SIRE)

Abstract: This paper investigates global term structure dynamics using a Bayesian hierarchical factor model augmented with macroeconomic fundamentals. More than half of the variation in bond yields of seven advanced economies is due to global co-movement, which is mainly attributed to shocks to non-fundamentals. Global fundamentals, especially global inflation, affect yields through a ‘policy channel’ and a ‘risk compensation channel’, but the effects through two channels are offset. This evidence explains the unsatisfactory performance of fundamentals-driven term structure models. Our approach delineates asymmetric spillovers in global bond markets connected to diverging monetary policies. The proposed model is robust as identified factors has significant explanatory power of excess returns. The finding that global inflation uncertainty is useful in explaining realized excess returns does not rule out regime changing as a source of non-fundamental fluctuations.

Keywords: Global Bond Markets; Term Structure of Interest Rates; Shocks to Fundamentals and Non-Fundamentals; Co-Movement; Contagion; Excess Return (search for similar items in EconPapers)
Date: 2015-06-15
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Working Paper: Co-Movement, Spillovers and Excess Returns in Global Bond Markets? (2015)
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