Domestic variance and international comovement bonds tests of interest rates
International Review of Financial Analysis
This article demonstrates that long rates exhibit both domestic excess variance and international excess comovement compared to fundamental yields derived from short rates under the rational expectations theory of term structure. The results are consistent for all countries sampled: the US, UK, Canada, Germany, and Japan. Probing deeper, long rates are found to “overreact” to domestic expected future inflation and/or short real rates both of which are the underlying components of the short nominal rate according to the Fisher hypothesis. Since inflation rates as well as short real rates are highly correlated between countries, the excess volatility in long rates translates into excess covariance (“co-overreact”) internationally.
Smoluk, Herbert J. PhD, "Domestic variance and international comovement bonds tests of interest rates" (1999). Faculty Publications. 88.