### 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 language | English |
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Place of Publication | Tilburg |

Publisher | Finance |

Number of pages | 36 |

Volume | 2000-91 |

Publication status | Published - 2000 |

### Publication series

Name | CentER Discussion Paper |
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Volume | 2000-91 |

### Keywords

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

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## 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). Finance.