The information in joint term structures of bond yields

Abstract

While the open-economy macroeconomics literature amply demonstrates the importance of allowing for trade and financial linkages between countries, the finance literature on the term structure of interest rates has largely adopted a “closed-economy” setting in which yields in one country depend only on their own lagged values. This paper examines whether it is in fact necessary to jointly model yields in multiple countries, as proposed by a handful of recent studies. We show that there is little convincing evidence that would point to such a need. The reason is that bond yields are forward-looking variables: any relevant information about foreign countries is likely to be already reflected in today’s domestic yield curve.