Three essays on global yield curve factors and international linkages across yield curves

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Abstract

This thesis presents three essays on global yield curve factors and international linkages across yield curves. The essays represent a contribution to our understanding of the effect of globalization on yields, addressing three topics: modeling global and local yield curve factors, modeling global and local yield curve factors in excess bond returns and a joint model of global macroeconomic and yield curve factors. The first essay proposes and develops an empirical model of global and local yield curve factors based on three factors proposed by Nelson and Siegel (1987) dynamized and reinterpreted by Diebold and Li (2006) as level, slope and curvature. The results support the existence of a global yield curve composed of global factors which together with local factors describe the yield curve of the USA, Germany and the UK. Specifically, the global factors explain on average 55% of the variance of yields, and impulse response functions indicate that shocks to global factors are larger and last longer than shocks to local factors. In the second essay, we examine the predictability content of the global and local yield curve factor model to predict excess bond returns one year ahead. We use a rolling window of fifteen years to compare in-sample predictability of our model and two benchmark models: the model proposed by Cochrane and Piazzesi (2005) and the global and local factor model proposed by Dahlquist and Hasseltoft (2011). The results indicate that the global and local yield curve factors from our model predict excess bond returns with an adjusted R² up to 59%. We also find that global factors explain up to 58% of the forecast error variance when predicting excess bond returns. Moreover, our model outperforms both competing models considering the USA, Germany and the UK. The third essay proposes and estimates a joint model of global macroeconomic and yield curve factors, which shows the interaction between global yield curve factors and global macroeconomic factors. Our findings show that the influence of macroeconomic factors on yield curve factors is stronger than the influence of yield curve factors on macroeconomic factors.

Keyword(s)

global yield curves; international linkages

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