Common Factors in International Bond Returns Revisited: A Common Principal Component Approach
41 Pages Posted: 4 Mar 2002
Date Written: February 2002
The movements of domestic term structures of interest rates are commonly assumed to be driven by a small number of factors, usually obtained from a principal component analysis. In order to model simultaneously the dynamics of several domestic term structures, principal component analysis is applied either to the pooled data or separately to each domestic term structure. Although researchers often notice that the shape of the factor loadings is the same for all countries but that the explained variance per factor is quite different across countries, they stop formulating constraints on parameters. This paper applies Common Principal Component analysis to deal with this issue.
Keywords: Term Structure, Interest Rates, Factor Models, Principal Component Analysis, Common Principal Component Analysis
JEL Classification: G15, C40
Suggested Citation: Suggested Citation