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The Financial Crisis and the Changing Dynamics of the Yield Curve

  • Morten L. Bech
  • Yvan Lengwiler


    (University of Basel)

We present evidence on the changing dynamics of the yield curve from 1998 to 2011. We identify four different phases. As expected, the financial crisis represents a period of elevated yield volatility, but it can be split into two distinct periods. The split occurs when the Federal Reserve reached the zero lower bound. This bound suppressed volatility in the short end of the yield curve while increasing volatility in the long end — despite lower overall volatility in financial markets. In line with previous studies, we find that announcements with regard to the Federal Reserve’s large scale asset purchases reduce longer term yields. We also quantify the effect of widely observed economic news, such as the non-farm payrolls and other items, on the yield curve.

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Paper provided by Faculty of Business and Economics - University of Basel in its series Working papers with number 2012/06.

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Date of creation: 2012
Date of revision:
Handle: RePEc:bsl:wpaper:2012/06
Contact details of provider: Postal: Peter-Merian-Weg 6, Postfach, CH-4002 Basel
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  1. Federico M. Bandi & Peter C.B. Phillips, 2001. "Fully Nonparametric Estimation of Scalar Diffusion Models," Cowles Foundation Discussion Papers 1332, Cowles Foundation for Research in Economics, Yale University.
  2. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  3. Kristensen, Dennis, 2010. "Nonparametric Filtering Of The Realized Spot Volatility: A Kernel-Based Approach," Econometric Theory, Cambridge University Press, vol. 26(01), pages 60-93, February.
  4. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  5. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
  6. Lengwiler, Yvan & Lenz, Carlos, 2010. "Intelligible factors for the yield curve," Journal of Econometrics, Elsevier, vol. 157(2), pages 481-491, August.
  7. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  8. Bruce M. Brown, 1999. "Beta-Bernstein Smoothing for Regression Curves with Compact Support," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 26(1), pages 47-59.
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