Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach
National Bureau of Economic Research, 2007 - Bonds - 20 pages
The popular Nelson-Siegel (1987) yield curve is routinely fit to cross sections of intra-country bond yields, and Diebold and Li (2006) have recently proposed a dynamized version. In this paper we extend Diebold-Li to a global context, modeling a potentially large set of country yield curves in a framework that allows for both global and country-specific factors. In an empirical analysis of term structures of government bond yields for the Germany, Japan, the U.K. and the U.S., we find that global yield factors do indeed exist and are economically important, generally explaining significant fractions of country yield curve dynamics, with interesting differences across countries.
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Akaike information criterion autocorrelation Business Cycle coming from global conditional distribution conjugate prior country factors country idiosyncratic factors country level factors Country Slope Factors country yield curves country-specific factor variation Decomposition of Country Descriptive Statistics Deviation Band Diebold Economic Estimated Country Level factor loadings Factor Mean Std Factors U.S. Germany Germany Japan U.K. Gibbs sampling global and country-specific global factor variation global level factor global slope factor global yield curve global yield factors government bond yields Journal Kalman filter latent factors level and slope log likelihoods log posterior odds macroeconomic Marginal Likelihood MCMC measurement equation model using monthly monthly yield data Notes to figure Notes to table posterior means posterior standard deviations principal components Rudebusch and Aruoba second sub-sample show posterior medians slope factor variation Term Structure text for details U.K. Factor U.S. Factor Mean U.S. Germany Japan variance decompositions variation and country-specific vector yield curve model