Common Factors in International Bond Returns and a Joint ATSM to Match Them

Abstract

The existence of common factors in international bond markets is an important cause for modelling different term structures of interest rates jointly. This paper investigates the common factors of US and UK treasury yields in the period of 1983 to 2012. A principal component analysis motivates the type of joint ATSM for modelling the yield curves of two distinct economies. In sum, two common factors explain 85% of the yield variation and the model factors have a solid economic intuition.