Co-movement and global factors in sovereign bond yields

Ioannis Venetis () and Avgoustinos Ladas

MPRA Paper from University Library of Munich, Germany

Abstract: We study the co-movement in international zero-coupon government bond yields using a recently proposed methodology by \cite{Choi2018} and \cite{Choi2021} for the estimation of multilevel factor models. We employ a readily available non-proprietary dataset coupled with open-source code which facilitates reproduction of the results but also comparability with the existing bibliography. The ten countries dataset is cross-sectionally expanded to eleven countries with newly constructed data series on the term structure of Greek constant-maturity, government zero-coupon bond rates. We find that the country pair US-Germany is most suitable as an initial candidate for global factor estimation. We confirm that three global factors account for most of the variation in zero-coupon bond yields leaving a small proportion to be (contemporaneously) explained by local factors. Global inflation and global real activity are related to the global level and slope factors. The third global factor, ``curvature'', is strongly related to economic/financial uncertainty linked to systemic risk stemming from the US financial markets.

Keywords: sovereign bonds; yield curve; term structure; multilevel factor model; global factors; local factors (search for similar items in EconPapers)
JEL-codes: C10 E43 G12 G15 (search for similar items in EconPapers)
Date: 2022-12-28
New Economics Papers: this item is included in nep-ifn
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