Detecting crisis vulnerability using yield spread interconnectedness

Fernando Garcia Alvarado

International Journal of Finance & Economics, 2022, vol. 27, issue 4, 3864-3880

Abstract: This paper explores the interconnections among foreign term spreads across different economies and their systemic implications on crisis vulnerability. The term spread, understood as the difference between long‐term and short‐term interest rates on Treasury securities, has a well‐known predictive ability to forecast economic recessions in the short‐run. An initial explanatory analysis evidences an increasing correlation between term spreads in the recent years and, in particular, the constitution of country clusters whose term structures share common latent factors. Moreover, these correlations seem to have augmented after the last international financial crisis. Further, the results from a probit model considering domestic term spreads, supply shocks on oil and energy prices, and an international term spread network structure reveal a statistically significant effect of term spread interconnectedness on future economic output. Following, this paper empirically shows how an increasing number of Granger‐causality in‐degree connections may be associated with a higher crisis vulnerability in the short‐run. Additionally, a panel data regression corroborates the latter result to be robust under a wide range of conditions. Thus, an economy whose term spread is significantly caused in the Granger sense by external yield rates may be more prone to experience future recessions.

Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1002/ijfe.2191

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ijfiec:v:27:y:2022:i:4:p:3864-3880

Ordering information: This journal article can be ordered from
http://jws-edcv.wile ... PRINT_ISSN=1076-9307

Access Statistics for this article

International Journal of Finance & Economics is currently edited by Mark P. Taylor, Keith Cuthbertson and Michael P. Dooley

More articles in International Journal of Finance & Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().