A multivariate latent factor decomposition of international bond yield spreads

Mardi Dungey, Vance L. Martin*, Adrian R. Pagan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

65 Citations (Scopus)

Abstract

A factor analysis of long-term bond spreads is performed by decomposing international interest rate spreads into national and global factors. The factors are latent, and are assumed to have GARCH-type specifications as well as exhibiting serial dependence. An indirect estimator is used to compute estimates of the unknown parameters. The sampling performance of this estimator is investigated and compared with an alternative direct estimator based on the Kalman predictor. The factor model is applied to weekly data on long-bond spreads between five countries - Australia. Japan, Germany, Canada and the UK - and the USA over the period 1991 to 1999. The resulting factor decomposition is used to examine the international investor's optimal portfolio decision in a mean-variance framework.

Original languageEnglish
Pages (from-to)697-715
Number of pages19
JournalJournal of Applied Econometrics
Volume15
Issue number6
DOIs
Publication statusPublished - 2000

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