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The increasing default risk of US Treasury securities due to the financial crisis

  • Nippani, Srinivas
  • Smith, Stanley D.
Registered author(s):

    This paper examines the impact of the current financial crisis on long-term US Treasury yields by testing the impact of a series of events from December 2007 to March 2009 on the spread between 10-year USD LIBOR swap and 10-year US Treasury (constant maturity) rates to measure risk associated with Treasuries. Controlling for the liquidity of the two markets, the default risk of the swap, and the net foreign purchases of Treasury securities, we find that 13 of the tested 20 events have significantly negative coefficients. We conclude that the lower spread is consistent with greater default risk for US Treasury securities.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4YVJ408-1/2/203b3e3a3a07f921c1139d01a99bf067
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2472-2480

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2472-2480
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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    1. 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.
    2. Jagadeesh Gokhale & Kent Smetters, 2005. "Measuring Social Security's Financial Problems," NBER Working Papers 11060, National Bureau of Economic Research, Inc.
    3. Joseph G. Haubrich, 2001. "Swaps and the swaps yield curve," Economic Commentary, Federal Reserve Bank of Cleveland, issue Dec.
    4. Anjan Thakor, 2006. "Commentary on "Is the United States bankrupt? "," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 251-258.
    5. Zivney, Terry L & Marcus, Richard D, 1989. "The Day the United States Defaulted on Treasury Bills," The Financial Review, Eastern Finance Association, vol. 24(3), pages 475-89, August.
    6. Laurence J. Kotlikoff, 2006. "Is the United States bankrupt?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 235-250.
    7. Bonfim, Diana, 2009. "Credit risk drivers: Evaluating the contribution of firm level information and of macroeconomic dynamics," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 281-299, February.
    8. Mardi Dungey & Charles Goodhart & Demosthenes Tambakis, 2005. "The Us Treasury Market In August 1998: Untangling The Effects Og Hong Kong And Russia With High Frequency Data," CAMA Working Papers 2005-25, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    9. 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.
    10. Liu, Pu & Shao, Yingying & Yeager, Timothy J., 2009. "Did the repeated debt ceiling controversies embed default risk in US Treasury securities?," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1464-1471, August.
    11. Claessens, Stijn & Demirgüç-Kunt, AslI & Moshirian, Fariborz, 2009. "Global financial crisis, risk analysis and risk measurement," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 1949-1952, November.
    12. Chen, Shiu-Sheng, 2009. "Predicting the bear stock market: Macroeconomic variables as leading indicators," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 211-223, February.
    13. Kotomin, Vladimir & Smith, Stanley D. & Winters, Drew B., 2008. "Preferred habitat for liquidity in international short-term interest rates," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 240-250, February.
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