What Drives the Japanese Yen Eurobond Term Structure of Japanese Bonds

Abstract

This paper investigates the long-run equilibrium implications of the Expectations Hypothesis of the term structure on different maturities of high-grade yen Eurobonds and Japanese Government Bonds (JGBs) using the Canonical Cointegrating Regression (CCR) technique developed by Park [Econometrica 60 (1992) 119]. Consistent with the Expectations Hypothesis, there is some evidence of long-run equilibrium relationship between JGBs and high-grade yen Eurobonds. Furthermore, the most liquid, long-term JGBs tend to drive the yen Eurobond term structure, with short-term yields adjusting to movements in the long-term yields.

Keywords: Long-run relationship, Expectations Hypothesis, Japanese yen Eurobonds, Canonical Cointegrating Regression, GARCH

JEL Classification: G10, G15, C22