IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

How did the financial crisis alter the correlations of U.S. yield spreads?

  • Silvio Contessi
  • Pierangelo De Pace
  • Massimo Guidolin

We investigate the pairwise correlations of 11 U.S. fixed income yield spreads over a sample that includes the Great Financial Crisis of 2007-2009. Using cross-sectional methods and non- parametric bootstrap breakpoint tests, we characterize the crisis as a period in which pairwise correlations between yield spreads were systematically and significantly altered in the sense that spreads comoved with one another much more than in normal times. We find evidence that, for almost half of the 55 pairs under investigation, the crisis has left spreads much more correlated than they were previously. This evidence is particularly strong for liquidity- and default-risk- related spreads, long-term spreads, and the spreads that were most likely directly affected by policy interventions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://research.stlouisfed.org/wp/2013/2013-005.pdf
Download Restriction: no

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2013-005.

as
in new window

Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:fip:fedlwp:2013-005
Contact details of provider: Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/

More information through EDIRC

Order Information: Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Longstaff, Francis A., 2010. "The subprime credit crisis and contagion in financial markets," Journal of Financial Economics, Elsevier, vol. 97(3), pages 436-450, September.
  2. Jun Liu & Francis A. Longstaff & Ravit E. Mandell, 2006. "The Market Price of Risk in Interest Rate Swaps: The Roles of Default and Liquidity Risks," The Journal of Business, University of Chicago Press, vol. 79(5), pages 2337-2360, September.
  3. Liuren Wu & Frank Xiaoling Zhang, 2008. "A No-Arbitrage Analysis of Macroeconomic Determinants of the Credit Spread Term Structure," Management Science, INFORMS, vol. 54(6), pages 1160-1175, June.
  4. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
  5. Dwyer, Gerald P. & Tkac, Paula, 2009. "The financial crisis of 2008 in fixed-income markets," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1293-1316, December.
  6. Robert F. Engle & José Gonzalo Rangel, 2009. "High and Low Frequency Correlations in Global Equity Markets," Working Papers 2009-17, Banco de México.
  7. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2008. "Inflation expectations and risk premiums in an arbitrage-free model of nominal and real bond yields," Working Paper Series 2008-34, Federal Reserve Bank of San Francisco.
  8. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market liquidity and funding liquidity," LSE Research Online Documents on Economics 24478, London School of Economics and Political Science, LSE Library.
  9. Mardi Dungey & George Milunovich & Susan Thorp & Minxian Yang, 2012. "Endogenous Crisis Dating and Contagion Using Smooth Transition Structural GARCH," Research Paper Series 312, Quantitative Finance Research Centre, University of Technology, Sydney.
  10. Diana Hancock & Wayne Passmore, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Finance and Economics Discussion Series 2011-01, Board of Governors of the Federal Reserve System (U.S.).
  11. Kristin Forbes & Roberto Rigobon, 1999. "No Contagion, Only Interdependence: Measuring Stock Market Co-movements," NBER Working Papers 7267, National Bureau of Economic Research, Inc.
  12. Scott Brave & Hesna Genay, 2011. "Federal Reserve policies and financial market conditions during the crisis," Working Paper Series WP-2011-04, Federal Reserve Bank of Chicago.
  13. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 239-53, January.
  14. Shin-ichi Fukuda, 2011. "Market-specific and Currency-specific Risk During the Global Financial Crisis: Evidence from the Interbank Markets in Tokyo and London," NBER Working Papers 16962, National Bureau of Economic Research, Inc.
  15. Tobias Adrian & Karin Kimbrough & Dina Marchioni, 2010. "The Federal Reserve's Commercial Paper Funding Facility," Staff Reports 423, Federal Reserve Bank of New York.
  16. Guidolin, Massimo & Tam, Yu Man, 2013. "A yield spread perspective on the great financial crisis: Break-point test evidence," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 18-39.
  17. Hancock, Diana & Passmore, Wayne, 2011. "Did the Federal Reserve's MBS purchase program lower mortgage rates?," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 498-514.
  18. Zhongjun Qu & Pierre Perron, 2007. "Estimating and Testing Structural Changes in Multivariate Regressions," Econometrica, Econometric Society, vol. 75(2), pages 459-502, 03.
  19. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  20. John Krainer, 2010. "Mortgage choice and the pricing of fixed-rate and adjustable-rate mortgages," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb1.
  21. Brian M. Doyle & Jon Faust, 2005. "Breaks in the Variability and Comovement of G-7 Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 721-740, November.
  22. Francis A. Longstaff, 2002. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices," NBER Working Papers 9312, National Bureau of Economic Research, Inc.
  23. Michael J. Fleming, 2003. "Measuring treasury market liquidity," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 83-108.
  24. Silvio Contessi & Pierangelo DePace, 2008. "Do European capital flows comove?," Working Papers 2008-042, Federal Reserve Bank of St. Louis.
  25. Asani Sarkar, 2009. "Liquidity risk, credit risk, and the federal reserve’s responses to the crisis," Financial Markets and Portfolio Management, Springer, vol. 23(4), pages 335-348, December.
  26. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2010. "Interest Rate Co-movements, Global Factors and the Long End of the Term Spread," SIRE Discussion Papers 2010-24, Scottish Institute for Research in Economics (SIRE).
  27. Grace Xing Hu & Jun Pan & Jiang Wang, 2013. "Noise as Information for Illiquidity," Journal of Finance, American Finance Association, vol. 68(6), pages 2341-2382, December.
  28. Johannes Stroebel & John B. Taylor, 2012. "Estimated Impact of the Federal Reserve’s Mortgage-Backed Securities Purchase Program," International Journal of Central Banking, International Journal of Central Banking, vol. 8(2), pages 1-42, June.
  29. Campbell, Sean & Covitz, Daniel & Nelson, William & Pence, Karen, 2011. "Securitization markets and central banking: An evaluation of the term asset-backed securities loan facility," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 518-531.
  30. Davies, Andrew, 2008. "Credit spread determinants: An 85 year perspective," Journal of Financial Markets, Elsevier, vol. 11(2), pages 180-197, May.
  31. Ng, Serena, 2006. "Testing Cross-Section Correlation in Panel Data Using Spacings," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 12-23, January.
  32. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
  33. Scott A. Brave & Hesna Genay, 2011. "Federal Reserve policies and financial market conditions during the crisis," Proceedings 1129, Federal Reserve Bank of Chicago.
  34. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
  35. Jonathan Batten & Warren Hogan & Gady Jacoby, 2005. "Measuring credit spreads: evidence from Australian Eurobonds," Applied Financial Economics, Taylor & Francis Journals, vol. 15(9), pages 651-666.
  36. De Pace, Pierangelo, 2013. "Currency Union, Free-Trade Areas, And Business Cycle Synchronization," Macroeconomic Dynamics, Cambridge University Press, vol. 17(03), pages 646-680, April.
  37. Caprio, Gerard Jr. & D'Apice, Vincenzo & Ferri, Giovanni & Puopolo, Giovanni Walter, 2010. "Macro Financial Determinants of the Great Financial Crisis: Implications for Financial Regulation," MPRA Paper 26088, University Library of Munich, Germany.
  38. Davide Furceri & Annabelle Mourougane, 2009. "Financial Crises: Past Lessons and Policy Implications," OECD Economics Department Working Papers 668, OECD Publishing.
  39. 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.
  40. Abrantes-Metz, Rosa M. & Kraten, Michael & Metz, Albert D. & Seow, Gim S., 2012. "Libor manipulation?," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 136-150.
  41. Sean Campbell & Daniel Covitz & William Nelson & Karen Pence, 2011. "Securitization markets and central banking: an evaluation of the term asset-backed securities loan facility," Finance and Economics Discussion Series 2011-16, Board of Governors of the Federal Reserve System (U.S.).
  42. Mardi Dungey & Diana Zhumabekova, 2001. "Testing for contagion using correlations: some words of caution," Pacific Basin Working Paper Series 2001-09, Federal Reserve Bank of San Francisco.
  43. Johannes C. Stroebel & John B. Taylor, 2009. "Estimated Impact of the Fed's Mortgage-Backed Securities Purchase Program," NBER Working Papers 15626, National Bureau of Economic Research, Inc.
  44. Joseph B. Nichols & Amy Cunningham, 2009. "A model of CMBS spreads," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
  45. Dungey, Mardi & Milunovich, George & Thorp, Susan, 2010. "Unobservable shocks as carriers of contagion," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1008-1021, May.
  46. Asani Sarkar, 2009. "Liquidity risk, credit risk, and the Federal Reserve's responses to the crisis," Staff Reports 389, Federal Reserve Bank of New York.
  47. Heiko Hesse & Nathaniel Frank, 2009. "The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis," IMF Working Papers 09/206, International Monetary Fund.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2013-005. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.