Common Factors in International Bond Returns

Research output: Working paperDiscussion paperOther research output

461 Downloads (Pure)

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 and 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.The five-factor model also provides a good fit of the expected returns of bond returns in all countries.We find similar results for bond returns that are not hedged for currency risk.Finally, we show how the model can be used to calculate the Value at Risk for international bond portfolios and to price cross-currency interest rate derivatives, and compare the results with simpler models.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages36
Volume2000-91
Publication statusPublished - 2000

Publication series

NameCentER Discussion Paper
Volume2000-91

Fingerprint

Bond returns
Common factors
Currency
Factors
Term structure
Maturity
Bond portfolio
Five-factor model
Germany
Currency risk
Value at risk
Japan
Interest rate derivatives
Expected returns

Keywords

  • bonds
  • return on investment
  • term structure of interest rates

Cite this

Driessen, J. J. A. G., Melenberg, B., & Nijman, T. E. (2000). Common Factors in International Bond Returns. (CentER Discussion Paper; Vol. 2000-91). Tilburg: Finance.
@techreport{e68d1d991c0f43a6977eea9b65cbc721,
title = "Common Factors in International Bond Returns",
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 and 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.The five-factor model also provides a good fit of the expected returns of bond returns in all countries.We find similar results for bond returns that are not hedged for currency risk.Finally, we show how the model can be used to calculate the Value at Risk for international bond portfolios and to price cross-currency interest rate derivatives, and compare the results with simpler models.",
keywords = "bonds, return on investment, term structure of interest rates",
author = "J.J.A.G. Driessen and B. Melenberg and T.E. Nijman",
note = "Pagination: 36",
year = "2000",
language = "English",
volume = "2000-91",
series = "CentER Discussion Paper",
publisher = "Finance",
type = "WorkingPaper",
institution = "Finance",

}

Driessen, JJAG, Melenberg, B & Nijman, TE 2000 'Common Factors in International Bond Returns' CentER Discussion Paper, vol. 2000-91, Finance, Tilburg.

Common Factors in International Bond Returns. / Driessen, J.J.A.G.; Melenberg, B.; Nijman, T.E.

Tilburg : Finance, 2000. (CentER Discussion Paper; Vol. 2000-91).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - Common Factors in International Bond Returns

AU - Driessen, J.J.A.G.

AU - Melenberg, B.

AU - Nijman, T.E.

N1 - Pagination: 36

PY - 2000

Y1 - 2000

N2 - 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 and 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.The five-factor model also provides a good fit of the expected returns of bond returns in all countries.We find similar results for bond returns that are not hedged for currency risk.Finally, we show how the model can be used to calculate the Value at Risk for international bond portfolios and to price cross-currency interest rate derivatives, and compare the results with simpler models.

AB - 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 and 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.The five-factor model also provides a good fit of the expected returns of bond returns in all countries.We find similar results for bond returns that are not hedged for currency risk.Finally, we show how the model can be used to calculate the Value at Risk for international bond portfolios and to price cross-currency interest rate derivatives, and compare the results with simpler models.

KW - bonds

KW - return on investment

KW - term structure of interest rates

M3 - Discussion paper

VL - 2000-91

T3 - CentER Discussion Paper

BT - Common Factors in International Bond Returns

PB - Finance

CY - Tilburg

ER -

Driessen JJAG, Melenberg B, Nijman TE. Common Factors in International Bond Returns. Tilburg: Finance. 2000. (CentER Discussion Paper).