International Bond Markets: A Cointegration Study
Bibliographic record
Abstract
ABSTRACT This study examines the relationships among government bond returns for the G-7 countries to identify possible diversification opportunities. Using cointegration and error correction models, there is evidence of common trends between these government bond returns. Recursive cointegration test results suggest that the stability of this relationship varies over time. The empirical evidence indicates that the available diversification benefits from investing across these markets are limited. INTRODUCTION With the increasing globalization of financial markets, investors face a greater opportunity set with which to address investment goals and strategies. The widening array of available investments extends investors' choices across assets that reflect firm, industry, and even economy wide characteristics. This study addresses one aspect of diversification opportunities across major international bond markets. Specifically, its objective is to determine whether government bond returns of the seven countries collectively known as the G-7 countries share long-run relationships using cointegration techniques. A long-term relationship between the total returns of these bonds would provide insights into investment possibilities and tactical choices investors make among these securities. As barriers to capital flows erode, weak-form market efficiency would suggest increasing similarities in the behavior of bond returns in combined markets. Dissimilar long-term bond returns could indicate the existence of valuable international diversification opportunities for investors and fund managers who, by rule or choice, hold significant amounts of government securities in their portfolios. The G-7 countries, Canada, United States (U.S.), United Kingdom (U.K.), France, Germany, Italy, and Japan have enjoyed relatively low capital barriers over a long period. If the lack of impediments to capital flows contributes to market efficiency, these countries can provide a good example of government bond markets across which returns follow similar patterns. That could further provide a preview of government bond markets on a greater scale in the face of the liberalization of capital flows that accompany increasingly global economic activity. For the purpose of this study, another motivation for selecting this group of government bonds is that the bonds of the G-7 comprise more than ninety percent of the total of all outstanding sovereign debt. Their dominance of the market for sovereign debt instruments is longstanding and their high volume relative to other government bonds raises the likelihood that they are the most widely distributed and liquid of all such bonds. For the interval between 1990 and 1999, inclusive, U.S. Treasury securities made up an average of 47.8% of the total followed by Japanese bonds with an average share of 21 .8%. The smallest average shares among these bonds over the same interval are those of U.K. (2.7%) and Canada (2.9%), each about double the largest share of non-G-7 nations. For government bonds of different countries to provide effective diversification, the government bond market in one country should not share the same trends as the government bond market in another country. In other words, if two markets are cointegrated, then the markets share systematic risk. In addition, if two markets are cointegrated, profitable arbitrage opportunities may exist between them (Chan, Gup, & Pan, 1997). The absence of such similarities would indicate longterm diversification opportunities across government bond markets. Numerous studies have explored the possibility of long-run relationships, using cointegration tests, for international interest rates and international stock market indexes. DeGennaro, Kunkel, & Lee (1994) find little evidence of cointegration between interest rates of Canada, Germany, Japan, and the United States. However, using the same data set of DeGennaro, et al. …
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How this classification was reachedexpand
Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.001 | 0.001 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.001 | 0.000 |
| Scholarly communication | 0.000 | 0.001 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from itClassification
machine, unvalidatedMachine predicted; a candidate call from one teacher head, not a consensus.
How this classification was reached, model by model and score by score, is at the end of the page under "How this classification was reached".