Testing for changing persistence in US Treasury on/off spreads under weighted-symmetric estimation

L. Vanessa Smith and Demosthenes N. Tambakis ()

European Journal of Finance, 2008, vol. 14, issue 2, pages 75-89

Abstract: The debt management policy changes of 1998-2001 and subsequent reversal of the US government's fiscal position have prompted research on the dynamics of the US Treasury bond market. The recursive break test procedure of Leybourne et al. (2003) is extended by using weighted-symmetric estimation to detect a single change in persistence in US Treasury on/off spreads. It is found that a significant change from I(0) to I(1) occurred in the late 1990s, which appears to be linked to changes in the US Treasury's debt management policy. Monte Carlo evidence shows that correcting for conditional heteroscedasticity in the data can successfully deal with the tests being oversized, albeit at a considerable loss in power for smaller sample sizes and large short-run variation in volatility. It is therefore advisable mainly for large sample sizes.

Keywords: persistence; unit root test; break point; Monte Carlo simulation; US Treasury bonds; liquidity (search for similar items in EconPapers)
Date: 2008
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