Assessing Integration of Bond Markets Using Excess Returns

In this research bond markets integration of five developed economies, including Canada, Germany, Switzerland, UK and USA, is investigated. In this work VAR, cointegration analysis, as well as PCA-based measures are applied to excess returns factors of zero coupon bonds of these five countries that are estimated as a first principal component of excess returns time series that are derived from monthly data yields to maturity and forward rates of zero coupon bonds with a time span from January 1988 to November 2007. All used integration measures reveal that bond markets intergation of considered contries became stronger in the period after 2000 than it was in the period before 2000. Links among international trade connections and bond markets integration are not proved for all these five countries during investigated time span by using international trade connections index. Keywords: bond markets integration, principal components analysis, excess returns, cointegration, Granger causality