Yield Spreads on Government Benchmark Bonds: Cross Country Evidence

Abstract

The aim of this paper is to learn the 10-year Government Benchmark Bond's behavior and effects on the other country's benchmark bond. For this purpose, we examined Abnormal Return and Cumulative Abnormal Return of Australia, Canada, Euro Zone, UK, Japan and the U.S.’s 10-year Government Benchmark Bond monthly rate from the period of January 2000 to April 2015. This study analyzed 184 nominal repurchase rates in a monthly base for each country's benchmark bond as a time series. In calculating Abnormal Return, US's Government Benchmark Bond's Rate and Euro Zone's Government Benchmark Bond's Rate have been determined as comparison parameters to the other countries. According to cumulative abnormal returns, we have detected which country has dramatically dropped against both the U.S.’s and Euro zone's benchmark bond yield. With this evidence, we have taken into account any co-integrating relationships among the countries’ benchmark bonds. We analyzed ( Johansen & Juselius, 1990 ) Co-integration Test to determine any long term relationship between them. In addition to the Co-integration test, we need to determine any short term effect for each series. In this study, we tested Vector Error Correction Model (VECM) to calculate the coefficient to hold balance between co-integration. We also tested ( Granger, 1988 ) to determine which benchmark bond has causality behavior to the other government benchmark bond.