Asymmetric dynamics in correlations of treasury and swap markets: Evidence from the US market

Yuki Toyoshima (), Go Tamakoshi and Shigeyuki Hamori

Journal of International Financial Markets, Institutions and Money, 2012, vol. 22, issue 2, 381-394

Abstract: Using the asymmetric dynamic conditional correlation (A-DCC) model developed by Cappiello et al. (2006), this paper empirically analyzes the conditional correlation between treasury and swap markets from February 9, 2006 to May 31, 2011, and makes two key contributions. First, the dynamics of the conditional correlation of only the 2-year maturity differs from those of other maturities. These patterns might be explained by the fact that a 2-year maturity is easily affected by market forecasts of monetary policy changes by the Federal Reserve Board. Second, the financial crisis dummies (ξ1) are all negative in particular with significance at the 5% level for 7 year, 10 year, and 30 year maturities. This result indicates that arbitrage transactions between treasuries and swaps have not taken place on a sufficient scale during the financial crisis period. As Ito (2010) points out, market participants have been uncertain about the direction of the monetary policies of these financial institutions.

Keywords: Asymmetric dynamic conditional correlation model; Treasury market; Swap market; Financial crisis; Contagion effect (search for similar items in EconPapers)
JEL-codes: E43 G14 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:22:y:2012:i:2:p:381-394

DOI: 10.1016/j.intfin.2011.12.002

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