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International linkages of term structures: US and Korea Treasury bond yields

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  • Yun, Jaeho

Abstract

This study analyzes the international linkages of term structures between the United States (US) and Korea using a Gaussian dynamic term structure model. The empirical analysis shows that the US level factor makes the most important contribution to the Korean term structure fluctuations. When two separate channels (i.e., policy and risk-compensation) are considered for propagating structural shocks into Korean bond yields, the policy channel dominates for the short-term rates, whereas for the long-term yield, the policy channel is dominant for the US level shock, but the risk channel is dominant for other shocks. These results are sensitive to whether or not small-sample bias is corrected. With a help of the bias correction, term premium estimates in the US and Korea exhibit substantial countercyclicality with respect to the US output gap. The US slope factor, which also has a significant impact on Korean long-term yields, is closely related to the global liquidity conditions for Korean bond returns.

Suggested Citation

  • Yun, Jaeho, 2023. "International linkages of term structures: US and Korea Treasury bond yields," Journal of International Money and Finance, Elsevier, vol. 138(C).
    • Handle: RePEc:eee:jimfin:v:138:y:2023:i:c:s0261560623001250
    DOI: 10.1016/j.jimonfin.2023.102924
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    References listed on IDEAS

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    1. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2010. "New Keynesian Macroeconomics and the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 33-62, February.
    2. Dewachter, Hans & Lyrio, Marco, 2006. "Macro Factors and the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 119-140, February.
    3. Glenn D. Rudebusch & Tao Wu, 2007. "Accounting for a Shift in Term Structure Behavior with No-Arbitrage and Macro-Finance Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 395-422, March.
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    More about this item

    Keywords

    International linkages of term structures; Gaussian dynamic term structure model; US level factor; Policy and risk-compensation channels; Global liquidity;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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