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Mildly Explosive Dynamics in U.S. Fixed Income Markets

Author

Listed:
  • Contessi, Silvio

    (Monash Business School)

  • De Pace, Pierangelo

    (Pomona College)

  • Guidolin, Massimo

    (Bocconi University and Baffi CAREFIN Centre)

Abstract

We use a recently developed right-tail variation of the Augmented Dickey-Fuller unit root test to identify and date-stamp periods of mildly explosive behavior in the weekly time series of eight U.S. fixed income yield spreads between September 2002 and April 2018. We find statistically significant evidence of mildly explosive dynamics in six of these spreads, two of which are short/medium-term mortgage- related spreads. We show that the time intervals characterized by instability that we estimate from these yield spreads capture known episodes of financial and economic distress in the U.S. economy. Mild explosiveness migrates from short-term funding markets to medium- and long-term markets during the Great Financial Crisis of 2007-09. Furthermore, we statistically validate the conjecture, originally suggested by Gorton (2009a,b), that the initial panic of 2007 migrated from segments of the ABX market to other U.S. fixed income markets in the early phases of the financial crisis.

Suggested Citation

  • Contessi, Silvio & De Pace, Pierangelo & Guidolin, Massimo, "undated". "Mildly Explosive Dynamics in U.S. Fixed Income Markets," Economics Department, Working Paper Series 1001, Economics Department, Pomona College, revised 12 Feb 2020.
  • Handle: RePEc:clm:pomwps:1001
    Note: Creation-Date: 2020-01-14
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    File URL: https://scholarship.claremont.edu/cgi/viewcontent.cgi?article=1001&context=pomona_fac_econ
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    Cited by:

    1. Contessi, Silvio & De Pace, Pierangelo, 2021. "The international spread of COVID-19 stock market collapses," Finance Research Letters, Elsevier, vol. 42(C).
    2. Anyfantaki, Sofia & Arvanitis, Stelios & Topaloglou, Nikolas, 2021. "Diversification benefits in the cryptocurrency market under mild explosivity," European Journal of Operational Research, Elsevier, vol. 295(1), pages 378-393.

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    More about this item

    Keywords

    finance; investment analysis; fixed income markets; yield spreads; mildly explosive behavior;
    All these keywords.

    JEL classification:

    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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