Why common factors in international bond returns are not so common [An article from: Journal of International Money and Finance]

This digital document is a journal article from Journal of International Money and Finance, published by Elsevier in 2007. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
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.