1 / 17

International Fixed Income

International Fixed Income. Topic IIIB: Currency Risk and Bond Returns. Outline. How Well Do U.S. Interest Rate Factors Explain Foreign Term Structures? Stylized Facts About Government Bond Returns. The Volatility of Government Bond Returns - A Data Analysis.

jenis
Download Presentation

International Fixed Income

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. International Fixed Income Topic IIIB: Currency Risk and Bond Returns

  2. Outline • How Well Do U.S. Interest Rate Factors Explain Foreign Term Structures? • Stylized Facts About Government Bond Returns. • The Volatility of Government Bond Returns - A Data Analysis

  3. I. Explaining Foreign Term Structure Movements Using US Rates • How much does the US term structure explain movements in the term structure across countries? • Case study: • G7 countries (US,UK,JPN,CAN,GER,ITA,FR) • 1996-1999 • Weekly movements in zeroes of 1yr-30yr maturities

  4. Correlations Between Principal Components US UK JPN CAN FRA GER ITA US UK JPN CAN FRA GER ITA

  5. Average R-Squared of Foreign Term Structure on US Interest Rate Factors

  6. Average R-Squared of Foreign Term Structure on US Interest Rate Factors & Exchange Rate

  7. II. Stylized Facts About Government Bond Returns • Look at $-adjusted foreign government bond returns (i.e., portfolio of bonds across maturities) • JP Morgan Indices for G7 countries • Means, Volatilities and Correlations

  8. Recall Rates of Return on Bonds Consider a a foreign government bond. What is it’s US $ rate of return? Taking logs of the above and rearranging gives us This is approximately equal to: [yield] - [dur x (Dr)] - %DS(Fn/$)

  9. Mean $-adjusted Annualized Return

  10. Volatility of $-adjusted Annualized Return

  11. Correlations Between Returns US UK JPN CAN FRA GER ITA US UK JPN CAN FRA GER ITA

  12. III. What Explains Government Bond Returns? • Relation between $-adjusted government bond returns and US interest rate factors • Relation between $-adjusted government bond returns and theoretical factors: • Foreign principal component • Foreign principal components (all 3) • Foreign principal components & exchange rate

  13. % of $-adjusted Returns Explained by Own 1st Principal Component Estimated coefficient =-5 to -6

  14. % of $-adjusted Returns Explained by Own 3 Principal Components

  15. % of $-adjusted Returns Explained by Own 1st Principal Component & Exchange Rate Estimated coefficient =-5 to -6 on 1st comp & -1 on XR

  16. % of $-adjusted Returns Explained by Own 3 Principal Components & Exchange Rate Estimated coefficient =-5 to -6

  17. Recall: % of Volatility of $-adjusted Foreign Bond Due to Currency Risk

More Related