Why Do Term Structures in Different Currencies Comove?
Publication Date
2-9-2012
Abstract
Yield curve fluctuations across different currencies are highly correlated. This paper investigates this phenomenon by exploring the channels through which macroeconomic shocks are transmitted across borders. Macroeconomic shocks affect current and expected future short-term rates as central banks react to changing economic environments. Investors may also respond to these shocks by altering their required compensation for risk. Macroeconomic shocks thus influence bond yields both through a “policy” channel as well as through a “risk compensation” channel. Using data from the U.S., the U.K., and Germany, we find that world inflation and U.S. yield level together explain over two-thirds of the co-variance of yields at all maturities. Further, these effects operate largely through the risk compensation channel for long-term bonds.
Document Type
Article
Keywords
Macro-finance term structure model, interest rates, cross-country comovement
Disciplines
Finance
DOI
10.2139/ssrn.2001788
Source
SMU Cox: Finance (Topic)
Language
English
