Why common factors in international bond returns are not so common
Perignon, Christophe, Smith, Daniel R., & Villa, Christophe (2007) Why common factors in international bond returns are not so common. Journal of International Money and Finance, 26(2), p. 284.
This paper analyzes the common factor structure of US, German, and Japanese Government bond returns. Unlike previous studies, we formally take into account the presence of country-specific factors when estimating common factors. We show that the classical approach of running a principal component analysis on a multi-country dataset of bond returns captures both local and common influences and therefore tends to pick too many factors. We conclude that US bond returns share only one common factor with German and Japanese bond returns. This single common factor is associated most notably with changes in the level of domestic term structures. We show that accounting for country-specific factors improves the performance of domestic and international hedging strategies.
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|Item Type:||Journal Article|
|Keywords:||Bond returns, Factor analysis, Principal component analysis|
|Subjects:||Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > BUSINESS AND MANAGEMENT (150300)|
|Divisions:||Current > QUT Faculties and Divisions > QUT Business School|
|Deposited On:||21 Apr 2010 01:07|
|Last Modified:||29 Feb 2012 13:56|
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