Common Factors in International Bond Returns

34 Pages Posted: 11 Apr 2000

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Tilburg University School of Economics and Management; Tilburg University - Center for Economic Research (CentER)

Theo Nijman

Tilburg University - Tilburg University School of Economics and Management

Bertrand Melenberg

Tilburg University - Center for Economic Research (CentER)

Date Written: February 7, 2000

Abstract

In this paper we estimate and interpret the factors that jointly determine bond returns of different maturities in the US, Germany and Japan. We analyze both currency-hedged as well as unhedged bond returns. For currency-hedged bond returns, we find that five factors explain 96.5% of the variation of bond returns. These factors can be associated with changes in the level and steepness of the term structures in (some of) these countries. In particular, it turns out that changes in the level of the term structures are correlated across countries, while changes in the steepness of the term structures are country-specific. We find similar results for bond returns that are not hedged for currency risk. We show how the model can be used to calculate duration-type risk measures and Value at Risks for international bond portfolios, and compare the results with simpler models. Finally, we demonstrate how cross-currency interest rate derivatives can be priced with the model.

JEL Classification: E43, F21, G12, G15

Suggested Citation

Driessen, Joost and Nijman, Theo E. and Melenberg, Bertrand, Common Factors in International Bond Returns (February 7, 2000). Available at SSRN: https://ssrn.com/abstract=216330 or http://dx.doi.org/10.2139/ssrn.216330

Joost Driessen (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Theo E. Nijman

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)

Bertrand Melenberg

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2730 (Phone)

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