Joint Modelling of International Yield Curves

Abstract

In this paper we propose a new approach to modelling and estimating yield curves across multiple currency areas. The idea is that one area acts as the 'cardinal' economy by affecting the yield curve evolution in the other markets. To some extent, the yield curve factors of the 'cardinal economy' serve the role as global yield curve factors. The adopted methodology is inspired by the 3-factor Nelson-Siegel yield curve model where a particular loading structure is identified for the 'non-cardinal' currency areas. Using US, German and Japanese data the model is shown to fit well both the cross-sectional and time-series dynamics of yields.

Keywords: Multiple yield curve model, Principal component analysis, State-space model

JEL Classification: C32, C33, C51, E43