Hostname: page-component-8448b6f56d-xtgtn Total loading time: 0 Render date: 2024-04-19T18:45:43.544Z Has data issue: false hasContentIssue false
  • English
  • Français

International Yield Comovements

Published online by Cambridge University Press:  04 May 2022

Geert Bekaert  and
Andrey Ermolov
Geert Bekaert
Affiliation:
Columbia Business School and Centre for Economic Policy Research gb241@gsb.columbia.edu
Andrey Ermolov*
Affiliation:
Fordham University, Gabelli School of Business
*
aermolov1@fordham.edu (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 1 , February 2023 , pp. 250 - 288
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

Some results have previously circulated under the title of “Inflation-Linked versus Nominal Bond Yields: On Liquidity and Inflation Risk Premiums Around the World.” We thank Hendrik Bessembinder (the editor), Matthias Fleckenstein and Andrea Vedolin (the referees), our discussants Korsaye Sofonias Alemu, Jean Helwege, and Liu Liu, and conference participants at the 2019 South Carolina Fixed Income and Financial Institutions Conference, 2020 Midwest Finance Association Annual Meeting, 2020 European Economic Association Meeting, 2020 Financial Management Association Meeting, and 2020 Paris December Finance Meeting for their constructive feedback. All errors are the sole responsibility of the authors.

References

Abrahams, M.; Adrian, T.; Crump, R.; Moench, E.; and Yu, R.. “Decomposing Real and Nominal Yield Curves.” Journal of Monetary Economics, 84 (2016), 182–200.CrossRefGoogle Scholar
Adrian, T.; Crump, R.; and Moench, E.. “Pricing the Term Structure with Linear Regressions.” Journal of Financial Economics, 110 (2013), 110–138.CrossRefGoogle Scholar
Ang, A.; Bekaert, G.; and Wei, M.. “Do Macro Variables, Asset Markets, or Surveys Forecast Inflation Better?” Journal of Monetary Economics, 54 (2007), 1163–1212.CrossRefGoogle Scholar
Ang, A.; Bekaert, G.; and Wei, M.. “The Term Structure of Real Rates and Expected Inflation.” Journal of Finance, 63 (2008), 797–849.CrossRefGoogle Scholar
Aruoba, B. “Term Structures of Inflation Expectations and Real Interest Rates.” Journal of Business and Economic Statistics, 38 (2020), 542–553.CrossRefGoogle Scholar
Bai, J.; Lumsdaine, R.; and Stock, J.. “Testing for and Dating Common Breaks in Multivariate Time Series.” Review of Economic Studies, 65 (1998), 395–432.CrossRefGoogle Scholar
Bekaert, G.; Engstrom, E.; and Ermolov, A.. “Macro Risks and the Term Structure of Interest Rates.” Journal of Financial Economics, 141 (2021), 479–504.CrossRefGoogle Scholar
Bekaert, G., and Wang, X.. “Inflation Risk and the Inflation Risk Premium.” Economic Policy, 64 (2010), 755–806.CrossRefGoogle Scholar
Berardi, A., and Plazzi, A.. “Dissecting the Yield Curve: The International Evidence.” Journal of Banking and Finance, 134 (2022), 106286.CrossRefGoogle Scholar
Campbell, J.; Shiller, R.; and Viceira, L.. “Understanding Inflation-Indexed Bond Markets.” In Brookings Papers on Economic Activity. Washington, DC: Brookings Institution Press (2009), 79–138.CrossRefGoogle Scholar
Campbell, J.; Sunderam, A.; and Viceira, L.. “Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds.” Critical Finance Review, 6 (2017), 263–301.CrossRefGoogle Scholar
Chen, A.; Engstrom, E.; and Grishchenko, O.. “Has the Inflation Risk Premium Fallen? Is It Now Negative?” FEDS Notes, Apr. 4 (2016).CrossRefGoogle Scholar
Chernov, M., and Creal, D.. “International Yield Curves and Currency Puzzles.” Journal of Finance, forthcoming (2022).CrossRefGoogle Scholar
Chordia, T.; Sarkar, A.; and Subrahmanyam, A.. “An Empirical Analysis of Stock and Bond Market Liquidity.” Review of Financial Studies, 18 (2005), 85–129.CrossRefGoogle Scholar
Christensen, J., and Gillan, J.. “Could the U.S. Treasury Benefit from Issuing More TIPS?” Working Paper, Federal Reserve Bank of San Francisco (2012).CrossRefGoogle Scholar
Christensen, J.; Lopez, J.; and Rudebusch, G.. “Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields.” Journal of Money, Credit, and Banking, 42 (2010), 143–178.CrossRefGoogle Scholar
D’Amico, S.; Kim, D.; and Wei, M.. “Tips from TIPS: the Informational Content of Treasury Inflation-Protected Security Prices.” Journal of Financial and Quantitative Analysis, 53 (2018), 395–436.CrossRefGoogle Scholar
Driscoll, J., and Kraay, A.. “Consistent Covariance Matrix Estimation with Spatially Dependent Panel Data.” Review of Economics and Statistics, 80 (1998), 549–560.CrossRefGoogle Scholar
Duffee, G. “Term Premia and Interest Rate Forecasts in Affine Models.” Journal of Finance, 57 (2002), 405–443.CrossRefGoogle Scholar
Duffee, G. “Expected Inflation and Other Determinants of Treasury Yields.” Journal of Finance, 73 (2018), 2139–2180.CrossRefGoogle Scholar
Ermolov, A. “When and Where Is It Cheaper to Issue Inflation-Linked Debt?” Review of Asset Pricing Studies, 11 (2021), 610–653.CrossRefGoogle Scholar
Evans, M. “Real Rates, Expected Inflation and Inflation Risk Premia.” Journal of Finance, 53 (1998), 187–218.CrossRefGoogle Scholar
Evans, M. “Real Risk, Inflation Risk, and the Term Structure.” Economic Journal, 113 (2003), 345–389.CrossRefGoogle Scholar
Fleckenstein, M. “The Inflation-Indexed Bond Puzzle.” Working Paper, University of Delaware (2013).CrossRefGoogle Scholar
Fleckenstein, M.; Longstaff, F.; and Lustig, H.. “The TIPS-Treasury Bond Puzzle.” Journal of Finance, 69 (2014), 2151–2197.CrossRefGoogle Scholar
Förster, M., and Tillmann, P.. “Reconsidering the International Comovement of Inflation.” Open Economies Review, 25 (2014), 841–863.CrossRefGoogle Scholar
Garcia, J., and Werner, T.. “Inflation Risks and Inflation Risk Premia.” Working Paper, European Central Bank (2010).CrossRefGoogle Scholar
Geyer, A.; Kossmeier, S.; and Pichler, S.. “Measuring Systematic Risk in EMU Government Yield Spreads.” Review of Finance, 8 (2004), 171–197.CrossRefGoogle Scholar
Grishchenko, O., and Huang, J.. “The Inflation Risk Premiu Evidence from the TIPS Market.” Journal of Fixed Income, 22 (2013), 5–30.CrossRefGoogle Scholar
Gürkaynak, R.; Sack, B.; and Wright, J.. “The U.S. Treasury Yield Curve: 1961 to the Present.” Journal of Monetary Economics, 54 (2007), 2291–2304.CrossRefGoogle Scholar
Gürkaynak, R.; Sack, B.; and Wright, J.. “The TIPS Yield Curve and Inflation Compensation.” American Economic Journal: Macroeconomics, 2 (2010), 70–92.Google Scholar
Haubrich, J.; Pennachi, G.; and Ritchken, P.. “Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps.” Review of Financial Studies, 25 (2012), 1588–1629.CrossRefGoogle Scholar
Hördahl, P., and Tristani, O.. “Inflation Risk Premia in the Euro Area and the United States.” International Journal of Central Banking, 10 (2014), 1–47.Google Scholar
Hu, G.; Pan, J.; and Wang, J.. “Noise as Information for Illiquidity.” Journal of Finance, 6 (2013), 2341–2382.CrossRefGoogle Scholar
Huebscher, R. “Uncovering the Mayhem in 2008 in the TIPS Market.” Advisor Perspectives Report, Aug. 4 (2009).Google Scholar
Joslin, S.; Singleton, K.; and Zhu, H.. “A New Perspective on Gaussian Dynamic Term Structure Models.” Review of Financial Studies, 25 (2011), 926–970.Google Scholar
Jotikasthira, C.; Le, A.; and Lundblad, C.. “Why Do Term Structures in Different Currencies Comove?” Journal of Financial Economics, 115 (2015), 58–83.CrossRefGoogle Scholar
Joyce, M.; Lildholdt, P.; and Sorensen, S.. “Extracting Inflation Expectations and Inflation Risk Premia from the Term Structure: A Joint Model of the UK Nominal and Real Yield Curves.” Journal of Banking and Finance, 34 (2010), 281–294.CrossRefGoogle Scholar
Kaminska, I.; Zhuoshi, L.; Relleen, J.; and Vangelista, E.. “What Do the Prices of UK Inflation-Linked Securities Say on Inflation Expectations, Risk Premia and Liquidity Risks?”, Journal of Banking and Finance, 88 (2018), 76–96.CrossRefGoogle Scholar
Kearns, J. “Global Inflation Forecasts.” Working Paper, Bank of International Settlements (2016).Google Scholar
Kim, D., and Orphanides, A.. “Term Structure Estimation with Survey Data on Interest Rate Forecasts.” Journal of Financial and Quantitative Analysis, 47 (2012), 241–272.CrossRefGoogle Scholar
Krishnamurthy, A. “The Bond/Old-Bond Spread.” Journal of Financial Economics, 66 (2002), 463–506.CrossRefGoogle Scholar
Lucas, R. “Interest Rates and Currency Prices in a Two-Country World.” Journal of Monetary Economics, 10 (1982), 335–359.CrossRefGoogle Scholar
Mian, A., and Sufi, A.. “The Great Recession: Lessons from Microeconomic Data.” American Economic Review, 100 (2010), 51–56.CrossRefGoogle Scholar
Monacelli, T., and Sala, L.. “The International Dimension of Inflation: Evidence from Disaggregated Consumer Price Data.” Journal of Money, Credit, and Banking, 41 (2009), 101–120.CrossRefGoogle Scholar
Nelson, C., and Siegel, A.. “Parsimonious Modeling of Yield Curves.” Journal of Business, 60 (1987), 473–489.CrossRefGoogle Scholar
Newey, W., and West, K.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Panyanukul, S. “Liquidity and International Bond Pricing.” Working Paper, The University of Warwick (2010).Google Scholar
Parker, M. “How Global is ‘Global Inflation’?” Journal of Macroeconomics, 58 (2018), 174–197.CrossRefGoogle Scholar
Pericoli, M. “Real Term Structure and Inflation Compensation in the Euro Area.” International Journal of Central Banking, 34 (2014), 1–42.Google Scholar
Pflueger, C., and Viceira, L.. “Return Predictability in the Treasury Market: Real Rates, Inflation, and Liquidity.” In Veronesi, P., ed. Handbook of Fixed-Income Securities. Hoboken, NJ: Wiley (2016), Chapter 10.Google Scholar
Risa, S. “Nominal and Inflation Indexed Yields: Separating Expected Inflation and Inflation Risk Premia.” Working Paper, Columbia University (2001).Google Scholar
Sack, B., and Elsasser, R.. “Treasury Inflation-Indexed Debt: A Review of the US Experience.” Economic Policy Review, 10 (2004), 47–63.Google Scholar
Shen, P. “Liquidity Risk Premia and Breakeven Inflation Rates.” Economic Review, 83 (2006), 29–54.Google Scholar
Song, D. “Bond Market Exposures to Macroeconomic and Monetary Policy Risks.” Review of Financial Studies, 30 (2017), 2761–2817.Google Scholar
Svensson, L. “Estimating and Interpreting Forweard Interest Rates: Sweden 1992–1994.” Working Paper, Stockholm University (1994).Google Scholar
To, T., and Tran, N.. “Cheap TIPS or Expensive Inflation Swaps? Mispricing in Real Asset Markets.” Working Paper, University of New South Wales and Virginia Polytechnic Institute and State University (2019).CrossRefGoogle Scholar
Wright, J. “Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset.” American Economic Review, 101 (2011), 1514–1534.CrossRefGoogle Scholar
Supplementary material: PDF

Bekaert and Ermolov supplementary material

Online Appendix

Download Bekaert and Ermolov supplementary material(PDF)
PDF 417.4 KB