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Asymmetric convergence and risk shift in the TED spreads


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  • Hammoudeh, Shawkat
  • Chen, Li-Hsueh
  • Yuan, Yuan


This study examines the asymmetry and adjustment to the long-run equilibrium for the TED spread formed as the difference between LIBOR and Treasury bill rates for three maturities. It also explores the adjustment each individual rate undergoes to move the spread to its equilibrium during widenings and narrowings. While the results show strong asymmetry in the spread movements, the adjustment clearly shows a shift in spread risk in 2007. Both asymmetry and convergence are also restored when the shift in risk is addressed. While the T bills generally adjust faster than LIBOR as our findings suggest, the speed for the three-month bills is phenomenal in the subperiod 2007–2008. The fast convergence of the shorter term than the longer term maturities during negative shocks and under higher risk indicates that the diagnostic of the crisis in 2007–2009 pertains to elevated risk than to lack of liquidity. The results should be valuable to investors, policy makers and researchers working on the 2007–2009 financial crisis.

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Bibliographic Info

Article provided by Elsevier in its journal The North American Journal of Economics and Finance.

Volume (Year): 22 (2011)
Issue (Month): 3 ()
Pages: 277-297

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Handle: RePEc:eee:ecofin:v:22:y:2011:i:3:p:277-297

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Keywords: Spreads; Convergence; Widenings; Narrowings; Equilibrium;

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Cited by:
  1. Caporin, Massimiliano, 2013. "Equity and CDS sector indices: Dynamic models and risk hedging," The North American Journal of Economics and Finance, Elsevier, vol. 25(C), pages 261-275.


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