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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.

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Abstract

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.

Impact and interest:

7 citations in Scopus
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6 citations in Web of Science®

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ID Code: 31890
Item Type: Journal Article
Keywords: Bond returns, Factor analysis, Principal component analysis
DOI: 10.1016/j.jimonfin.2006.11.006
ISSN: 02615606
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 11:07
Last Modified: 29 Feb 2012 23:56

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