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2018 | OriginalPaper | Buchkapitel

Dynamic Linkages Across Country Yield Curves: The Effects of Global and Local Yield Curve Factors on US, UK and German Yields

verfasst von : Laura Coroneo, Ian Garrett, Javier Sanhueza

Erschienen in: New Methods in Fixed Income Modeling

Verlag: Springer International Publishing

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Abstract

We analyze the relationship between the yield curves of the USA, the UK and Germany using global and local factors. Our focus is on dynamic linkages across and between yield curves and factors. We disentangle the latent global and local factors contained in country factors, based on the Diebold and Li (J Econometrics 130:337–364, 2006) parametrization of Nelson and Siegel’s (1987) three factor model and a quasi-maximum likelihood approach. The results indicate that global factors explain on average 55% of the variance of yields. Using impulse response analysis, we examine the effects of shocks to the factors on yields. We find that the response of yields to shocks to global factors is larger and longer-lasting than the response to shocks to local factors.

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Vorheriges Kapitel Stochastic Recovery Rate: Impact of Pricing Measure’s Choice and Financial Consequences on Single-Name Products

Nächstes Kapitel Estimating the No-Negative-Equity Guarantee in Reverse Mortgages: International Sensitivity Analysis

Criticisms of the NS class of models are that they are not supported by a theoretical framework and are not necessarily arbitrage free. However, Coroneo et al. (2011) provide a detailed discussion about how arbitrage-free the NS model actually is. Their conclusions indicate that from a statistical point of view, the factors in the NS model are not different from those of arbitrage-free models at the 99% confidence level. Additionally, Christensen et al. (2011) develop a theoretical framework in order to estimate an affine arbitrage-free NS model (AFNS) maintaining the factor loadings of the NS model.

Specifically, the cross-factor interaction is between level and slope, level and curvature, and slope and curvature for the USA, Germany and the UK.

[Diebold et al. 2008, p. 355] indicate that while under normality assumptions the estimation of the model for a single country is straightforward, in a multi-country framework estimation by maximum likelihood is “particularly difficult to implement” given the “large number of parameters to be estimated.” For this reason they use a Bayesian approach.

As suggested by Diebold and Li (2006), the decay factor \(\lambda \) is fixed at 0.0609 in order to maximize the curvature loadings and to aid the numerical optimization process.

In the case of the data taken from the BIS database, the data is provided to BIS by the central banks of the respective countries.

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Titel: Dynamic Linkages Across Country Yield Curves: The Effects of Global and Local Yield Curve Factors on US, UK and German Yields
verfasst von: Laura Coroneo
Ian Garrett
Javier Sanhueza
Verlag: Springer International Publishing
Buch: New Methods in Fixed Income Modeling
Print ISBN: 978-3-319-95284-0

Electronic ISBN: 978-3-319-95285-7

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-95285-7_12