IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Change Detection and the Casual Impact of the Yield Curve

Listed author(s):
  • Stan Hurn

    ()

    (QUT)

  • Peter C B Phillips

    ()

    (Yale)

  • Shuping Shi

    ()

    (Macquarie)

Causal relationships in econometrics are typically based on the concept of predictability and are established in terms of tests for Granger causality. These causal relationships are susceptible to change, especially during times of financial turbulence, making the real-time detection of instability an important practical issue. This paper develops a test for detecting changes in causal relationships based on a recursive rolling window, which is analogous to the procedure used in recent work on financial bubble detection. The limiting distribution of the test takes a simple form under the null hypothesis and is easy to implement in conditions of homoskedasticity, conditional heteroskedasticity and unconditional heteroskedasticity. Simulation experiments compare the efficacy of the proposed test with two other commonly used tests, the forward recursive and the rolling window tests. The results indicate that both the rolling and the recursive rolling approaches offer good finite sample performance in situations where there are one or two changes in the causal relationship over the sample period. The testing strategies are illustrated in an empirical application that explores the causal impact of the slope of the yield curve on output and inflation in the U.S. over the period 1985-2013.

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://www.ncer.edu.au/papers/documents/WP107.pdf
Download Restriction: no

Paper provided by National Centre for Econometric Research in its series NCER Working Paper Series with number 107.

as
in new window

Length: 72 pages
Date of creation: 27 Aug 2015
Handle: RePEc:qut:auncer:2015_05
Contact details of provider: Phone: 07 3138 5066
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au

More information through EDIRC

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. Hafer, R W & Kutan, A M, 1997. "More Evidence on the Money-Output Relationship," Economic Inquiry, Western Economic Association International, vol. 35(1), pages 48-58, January.
  2. Francis X. Diebold & Monika Piazzesi & Glenn D. Rudebusch, 2005. "Modeling Bond Yields in Finance and Macroeconomics," American Economic Review, American Economic Association, vol. 95(2), pages 415-420, May.
  3. Opschoor, Anne & van Dijk, Dick & van der Wel, Michel, 2014. "Predicting volatility and correlations with Financial Conditions Indexes," Journal of Empirical Finance, Elsevier, vol. 29(C), pages 435-447.
  4. Chang, Eric C. & Cheng, Joseph W. & Khorana, Ajay, 2000. "An examination of herd behavior in equity markets: An international perspective," Journal of Banking & Finance, Elsevier, vol. 24(10), pages 1651-1679, October.
  5. Boswijk, H. Peter & Cavaliere, Giuseppe & Rahbek, Anders & Taylor, A.M. Robert, 2016. "Inference on co-integration parameters in heteroskedastic vector autoregressions," Journal of Econometrics, Elsevier, vol. 192(1), pages 64-85.
  6. Haroon Mumtaz & Paolo Surico, 2009. "Time-varying yield curve dynamics and monetary policy," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 895-913.
  7. Benati, Luca & Goodhart, Charles, 2008. "Investigating time-variation in the marginal predictive power of the yield spread," Journal of Economic Dynamics and Control, Elsevier, vol. 32(4), pages 1236-1272, April.
  8. Davidson, James, 1994. "Stochastic Limit Theory: An Introduction for Econometricians," OUP Catalogue, Oxford University Press, number 9780198774037.
  9. Peter C. B. Phillips & Yangru Wu & Jun Yu, 2011. "EXPLOSIVE BEHAVIOR IN THE 1990s NASDAQ: WHEN DID EXUBERANCE ESCALATE ASSET VALUES?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(1), pages 201-226, 02.
  10. Hamilton, James D & Kim, Dong Heon, 2002. "A Reexamination of the Predictability of Economic Activity Using the Yield Spread," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(2), pages 340-360, May.
  11. Marcelle Chauvet & Simon Potter, 2005. "Forecasting recessions using the yield curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 24(2), pages 77-103.
  12. Francis X. Diebold & Kamil Yilmaz, 2013. "Measuring the Dynamics of Global Business Cycle Connectedness," PIER Working Paper Archive 13-070, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  13. Mishkin, Frederic S., 1990. "What does the term structure tell us about future inflation?," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 77-95, January.
  14. Frederic S. Mishkin, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 815-828.
  15. Shimotsu, Katsumi, 2012. "Exact local Whittle estimation of fractionally cointegrated systems," Journal of Econometrics, Elsevier, vol. 169(2), pages 266-278.
  16. Evans, Charles L. & Marshall, David A., 2007. "Economic determinants of the nominal treasury yield curve," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1986-2003, October.
  17. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March.
  18. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
  19. Goncalves, Silvia & Kilian, Lutz, 2004. "Bootstrapping autoregressions with conditional heteroskedasticity of unknown form," Journal of Econometrics, Elsevier, vol. 123(1), pages 89-120, November.
  20. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
  21. Peter C. B. Phillips & Jun Yu, 2011. "Dating the timeline of financial bubbles during the subprime crisis," Quantitative Economics, Econometric Society, vol. 2(3), pages 455-491, November.
  22. Leybourne Stephen & Kim Tae-Hwan & Taylor A.M. Robert, 2007. "Detecting Multiple Changes in Persistence," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 11(3), pages 1-34, September.
  23. GlennD. Rudebusch & Tao Wu, 2008. "A Macro-Finance Model of the Term Structure, Monetary Policy and the Economy," Economic Journal, Royal Economic Society, vol. 118(530), pages 906-926, 07.
  24. Dewachter, Hans & Lyrio, Marco, 2006. "Macro Factors and the Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 119-140, February.
  25. Peter C. B. Phillips & Shuping Shi & Jun Yu, 2015. "Testing For Multiple Bubbles: Limit Theory Of Real‐Time Detectors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 1079-1134, November.
  26. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2011. "Monetary Policy Shifts and the Term Structure," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 429-457.
  27. Joseph G. Haubrich & Ann M. Dombrosky, 1996. "Predicting real growth using the yield curve," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 26-35.
  28. Morten O. Ravn & Zacharias Psaradakis & Martin Sola, 2005. "Markov switching causality and the money-output relationship," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 665-683.
  29. Matteo Modena, 2008. "An Empirical Analysis of the Curvature Factor of the Term Structure of Interest Rates," Working Papers 2008_35, Business School - Economics, University of Glasgow.
  30. Arturo Estrella & Anthony P. Rodrigues & Sebastian Schich, 2003. "How Stable is the Predictive Power of the Yield Curve? Evidence from Germany and the United States," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 629-644, August.
  31. Granger, C. W. J., 1988. "Some recent development in a concept of causality," Journal of Econometrics, Elsevier, vol. 39(1-2), pages 199-211.
  32. Aruoba, S. BoraÄŸan & Diebold, Francis X. & Scotti, Chiara, 2009. "Real-Time Measurement of Business Conditions," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 417-427.
  33. Viral V. Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? - Bank Bailouts and Sovereign Credit Risk," NBER Working Papers 17136, National Bureau of Economic Research, Inc.
  34. Ole E. Barndorff-Nielsen & Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280.
  35. Hua Chen & J. David Cummins & Krupa S. Viswanathan & Mary A. Weiss, 2014. "Systemic Risk and the Interconnectedness Between Banks and Insurers: An Econometric Analysis," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(3), pages 623-652, 09.
  36. Peter C. B. Phillips & Ke-Li Xu, 2006. "Inference in Autoregression under Heteroskedasticity," Journal of Time Series Analysis, Wiley Blackwell, vol. 27(2), pages 289-308, March.
  37. Vipin Arora & Shuping Shi, 2016. "Energy consumption and economic growth in the United States," Applied Economics, Taylor & Francis Journals, vol. 48(39), pages 3763-3773, August.
  38. Cavaliere, Giuseppe & Rahbek, Anders & Taylor, A.M. Robert, 2010. "Cointegration Rank Testing Under Conditional Heteroskedasticity," Econometric Theory, Cambridge University Press, vol. 26(06), pages 1719-1760, December.
  39. Bianchi, Francesco & Mumtaz, Haroon & Surico, Paolo, 2009. "Dynamics of the term structure of UK interest rates," Bank of England working papers 363, Bank of England.
  40. Arturo Estrella & Mary R. Trubin, 2006. "The yield curve as a leading indicator: some practical issues," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 12(Jul).
  41. Shimotsu, Katsumi, 2010. "Exact Local Whittle Estimation Of Fractional Integration With Unknown Mean And Time Trend," Econometric Theory, Cambridge University Press, vol. 26(02), pages 501-540, April.
  42. Swanson, Norman R., 1998. "Money and output viewed through a rolling window," Journal of Monetary Economics, Elsevier, vol. 41(3), pages 455-474, May.
  43. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
  44. Raffaella Giacomini & Barbara Rossi, 2006. "How Stable is the Forecasting Performance of the Yield Curve for Output Growth?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(s1), pages 783-795, December.
  45. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  46. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2003. "Modeling and Forecasting Realized Volatility," Econometrica, Econometric Society, vol. 71(2), pages 579-625, March.
  47. Guilkey, David K & Salemi, Michael K, 1982. "Small Sample Properties of Three Tests for Granger-Causal Ordering in a Bivariate Stochastic System," The Review of Economics and Statistics, MIT Press, vol. 64(4), pages 668-680, November.
  48. Arturo Estrella, 2005. "Why Does the Yield Curve Predict Output and Inflation?," Economic Journal, Royal Economic Society, vol. 115(505), pages 722-744, 07.
  49. Balcilar, Mehmet & Ozdemir, Zeynel Abidin & Arslanturk, Yalcin, 2010. "Economic growth and energy consumption causal nexus viewed through a bootstrap rolling window," Energy Economics, Elsevier, vol. 32(6), pages 1398-1410, November.
  50. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
  51. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  52. Viral Acharya & Itamar Drechsler & Philipp Schnabl, 2011. "A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk," Working Papers 2012-004, Becker Friedman Institute for Research In Economics.
  53. Galariotis, Emilios C. & Rong, Wu & Spyrou, Spyros I., 2015. "Herding on fundamental information: A comparative study," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 589-598.
  54. Stern, David I., 2000. "A multivariate cointegration analysis of the role of energy in the US macroeconomy," Energy Economics, Elsevier, vol. 22(2), pages 267-283, April.
  55. Rudebusch, Glenn D. & Williams, John C., 2009. "Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 492-503.
  56. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
  57. Christian M. Hafner & Helmut Herwartz, 2009. "Testing for linear vector autoregressive dynamics under multivariate generalized autoregressive heteroskedasticity," Statistica Neerlandica, Netherlands Society for Statistics and Operations Research, vol. 63(3), pages 294-323.
  58. Stock, James H. & Watson, Mark W., 1989. "Interpreting the evidence on money-income causality," Journal of Econometrics, Elsevier, vol. 40(1), pages 161-181, January.
  59. Galariotis, Emilios C. & Krokida, Styliani-Iris & Spyrou, Spyros I., 2016. "Bond market investor herding: Evidence from the European financial crisis," International Review of Financial Analysis, Elsevier, vol. 48(C), pages 367-375.
  60. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
  61. Hamilton, James D., 2011. "Calling recessions in real time," International Journal of Forecasting, Elsevier, vol. 27(4), pages 1006-1026, October.
  62. Connolly, Robert A. & Wang, F. Albert, 2003. "International equity market comovements: Economic fundamentals or contagion?," Pacific-Basin Finance Journal, Elsevier, vol. 11(1), pages 23-43, January.
  63. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
  64. Chauvet, Marcelle & Senyuz, Zeynep, 2008. "A Joint Dynamic Bi-Factor Model of the Yield Curve and the Economy as a Predictor of Business Cycles," MPRA Paper 15076, University Library of Munich, Germany, revised Apr 2009.
  65. Chauvet, Marcelle & Potter, Simon, 2002. "Predicting a recession: evidence from the yield curve in the presence of structural breaks," Economics Letters, Elsevier, vol. 77(2), pages 245-253, October.
  66. Thoma, Mark A., 1994. "Subsample instability and asymmetries in money-income causality," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 279-306.
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:qut:auncer:2015_05. 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: (School of Economics and Finance)

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.