Dynamic Linkages among Major Sovereign Bond Yields

Abstract

This article investigates the dynamic linkages among four major sovereign bond yields (German, Japanese, U.K., and U.S.) for the 1990–2010 period. Using VAR analysis and Engle’s dynamic conditional correlation GARCH specification, the author examines the short- and long-run linkages between yield pairs and finds that yield correlations are time-varying and differ during economic expansions and contractions. Finally, the author assesses the impact of bond yield correlations on the other bond yields’ dynamic correlations and report that the U.S. bond yield volatility affects the other yields’ correlations differently. The results have significant implications for bond portfolio construction and monetary policymaking.

TOPICS: Fixed-income portfolio management, global markets, volatility measures, statistical methods