Title: Global bond market interaction: An arbitrage-free dynamic Nelson Siegel modeling approach
Authors: Takeshi Kobayashi - NUCB Business School (Japan) [presenting]
Abstract: A previous approach is extended to an arbitrage-free setting, proposing a global factor model in which country yield-level and slope factors may depend on global-level, slope and curvature factors as well as country-specific factors. Using a monthly dataset of government bond yields for Germany, Japan, the US, and the UK from January 1995 to November 2018, we extract global and country-specific factors for both the full sample. The results indicate strongly that global yield-level, slope, and curvature factors do indeed exist and are economically important, accounting for a significant fraction of variation in country bond yields with interesting differences across countries. Moreover, the global yield factors appear linked to global macroeconomic fundamentals. We show, in particular, that curvature factors are key to explaining term premium dynamics, and appear more important in the second sub-sample.