Why Do Term Structures in Different Currencies Comove?

86 Pages Posted: 9 Feb 2012 Last revised: 18 Feb 2014

Chotibhak Jotikasthira

Southern Methodist University (SMU) - Edwin L. Cox School of Business; University of North Carolina Kenan-Flagler Business School

Anh Le

University of North Carolina Kenan-Flagler Business School

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Date Written: December 1, 2013

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.

Keywords: Macro-finance term structure model, interest rates, cross-country comovement

JEL Classification: G12, G15, E43, C58

Suggested Citation

Jotikasthira, Chotibhak and Le, Anh and Lundblad, Christian T., Why Do Term Structures in Different Currencies Comove? (December 1, 2013). Journal of Financial Economics (JFE), Forthcoming; UNC Kenan-Flagler Research Paper No. 2013-11. Available at SSRN: https://ssrn.com/abstract=2001788 or http://dx.doi.org/10.2139/ssrn.2001788

Chotibhak Jotikasthira (Contact Author)

Southern Methodist University (SMU) - Edwin L. Cox School of Business ( email )

P.O. Box 750333
Dallas, TX 75275-0333
United States

University of North Carolina Kenan-Flagler Business School ( email )

Chapel Hill, NC 27599-3490
United States

Anh Le

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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