The contribution of US bond demand to the US bond yield conundrum of 2004–2007: An empirical investigation
AbstractAlthough the federal funds rate started rising from mid-2004 US long term rates continued to fall. A likely contributory factor to this ‘conundrum’ was the contemporaneous increase in US bond demand. Using ARDL based models, which accommodate structural breaks, this paper estimates the impact of foreign and domestic demand on AAA rated US bond yields in the ‘conundrum’ period. This impact is shown to have been everywhere significantly negative. The fact that our model fully explains the ‘bond yield conundrum’ gives support to the hypothesis that the US CDO market was rapidly expanded before 2007 chiefly to absorb the overspill of global demand for safe assets. Moreover, our models demonstrate that there are strong linkages between the 10-year Treasury yield and the long term yields of AAA rated non-Treasury bonds.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.
Volume (Year): 27 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/intfin
ARDL modeling; Bond yield conundrum; Investor demand; Subprime crisis; Structural breaks;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- G01 - Financial Economics - - General - - - Financial Crises
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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