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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 [email protected]
Andrey Ermolov*
Affiliation:
Fordham University, Gabelli School of Business
*
[email protected] (corresponding author)
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Abstract

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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

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.

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