Title: A global model of international yield curves: Regime-switching dynamic Nelson-Siegel modeling approach
Authors: Takeshi Kobayashi - NUCB Business School (Japan) [presenting]
Abstract: The importance of examining yields at a multi-country level has been highlighted by the most financial crisis, which has shown that financial markets are globally interconnected. We have extended previous work which modeled a potentially large set of country yield curves to a regime-switching setting, proposing a global factor model in which country yield-level, slope and curvature factors may depend on global-level, slope and curvature factors as well as local factors using a monthly dataset of government bond yields for the US, Germany, Japan and the UK. 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. We discuss the interpretation of regime probabilities and economic variables and how the yield curve moves between two regimes. The results suggest that regimes are related to business cycles. This results would help bonds portfolio manager to consider its country allocation decision and risk management. They contribute to the literature by assessing the degrees of the interaction of each country yield curve to a global factor in different regimes.