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Did the repeated debt ceiling controversies embed default risk in US Treasury securities?

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  • Liu, Pu
  • Shao, Yingying
  • Yeager, Timothy J.
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    Abstract

    We examine whether the financial market charged a default risk premium to US Treasury securities when the US Federal government repeatedly reached the legally binding debt limits between 2002 and 2006. We show that for the first two of the four recurrences since the first episode in 1996, the financial market charged a small default risk premium to the Treasury securities. However, we find no significant evidence of a pricing effect in the last two recurrences. The results suggest that the financial market gradually perceived the budget standoffs as the boy who cried wolf.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 8 (August)
    Pages: 1464-1471

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:8:p:1464-1471

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Default risk Treasury securities Treasury default Risk premium US debt limit Yield spread;

    References

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    1. Diana Bonfim, 2006. "Credit Risk Drivers: Evaluating the Contribution of Firm Level Information and of Macroeconomic Dynamics," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
    2. Nippani, Srinivas & Liu, Pu & Schulman, Craig T., 2001. "Are Treasury Securities Free of Default?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(02), pages 251-265, June.
    3. Carling, Kenneth & Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2007. "Corporate credit risk modeling and the macroeconomy," Journal of Banking & Finance, Elsevier, vol. 31(3), pages 845-868, March.
    4. Thomas K. Hahn, 1993. "Commercial paper," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 45-67.
    5. Laurence J. Kotlikoff, 2006. "Is the United States bankrupt?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 235-250.
    6. Wang, Junbo & Wu, Chunchi & Zhang, Frank X., 2008. "Liquidity, default, taxes, and yields on municipal bonds," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1133-1149, June.
    7. Landschoot, Astrid Van, 2008. "Determinants of yield spread dynamics: Euro versus US dollar corporate bonds," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2597-2605, December.
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    Cited by:
    1. Nippani, Srinivas & Smith, Stanley D., 2010. "The increasing default risk of US Treasury securities due to the financial crisis," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2472-2480, October.
    2. Srinivas Nippani & Stanley D. Smith, 2009. "The Increasing Default Risk of U.S. Treasuries Securities Due to the Financial Crisis," NFI Working Papers 2010-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.

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