THE G-7 GOVERNMENT BOND MARKETS: A COINTEGRATION STUDY

Abstract: This thesis examines the long-run relationship among government bond total return indexes for the G-7 nations using weekly observations from 1993 to 2022. Using cointegration and error correction models, this study finds long-run relationships for the G-7 government bond markets as a group and evidence for pairwise cointegration between the US government bond market and many of the other G-7 government bond markets. The results imply that diversification benefits by investing across these markets are limited, with hedged US investors having more opportunities than non-hedged investors. Evidence for short-term arbitrage opportunities was also found for the hedged US investor investing in the French and Italian markets. Weak evidence for progressive cointegration between the G-7 government bond markets was also discovered using a backward recursive cointegration test.