Infectious disease-related uncertainty and the safe-haven characteristic of US treasury securities

Rangan Gupta, Sowmya Subramaniam, Elie Bouri () and Qiang Ji

International Review of Economics & Finance, 2021, vol. 71, issue C, 289-298

Abstract: This paper analyses the impact of a newspaper-based uncertainty associated with infectious diseases (EMVID) on the level, slope and curvature factors derived from the term structure of interest rates of the US covering maturities from 1 year to 30 years. Results from nonlinearity and structural break tests indicate the misspecification of the linear causality model and point to the suitability of applying a time-varying model. A DCC-MGARCH framework is thus applied and the results indicate significant predictability of the three latent factors from the EMVID index at each point of the entire sample, and also provide evidence of instantaneous spillover. Finally, the results of measuring safe-haven characteristic of the US Treasury market show that US treasuries with long-term maturities as captured by the level factor are consistently negatively correlated with the EMVID index, i.e., they act as a safe-haven, with the slope factor (medium-term maturities) following this trend since 2007, and the slope factor (short-term maturities) also showing signs of a safe-haven since May of 2020. Overall, the findings provide reasonable evidence that US Treasury securities can hedge the risks associated with the financial market in the wake of the current COVID-19 pandemic.

Keywords: Yield curve factors; Financial market uncertainty; Infectious diseases; COVID-19; Time-varying granger causality (search for similar items in EconPapers)
JEL-codes: C22 C32 D80 E43 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (40)

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Working Paper: Infectious Disease-Related Uncertainty and the Safe-Haven Characteristic of US Treasury Securities (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:71:y:2021:i:c:p:289-298

DOI: 10.1016/j.iref.2020.09.019

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