How did the financial crisis alter the correlations of U.S. yield spreads?

Silvio Contessi, Pierangelo De Pace and Massimo Guidolin

No 2013-005, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We investigate the pairwise correlations of 11 U.S. fixed income yield spreads over a sample that includes the Great Financial Crisis of 2007-2009. Using cross-sectional methods and non- parametric bootstrap breakpoint tests, we characterize the crisis as a period in which pairwise correlations between yield spreads were systematically and significantly altered in the sense that spreads comoved with one another much more than in normal times. We find evidence that, for almost half of the 55 pairs under investigation, the crisis has left spreads much more correlated than they were previously. This evidence is particularly strong for liquidity- and default-risk- related spreads, long-term spreads, and the spreads that were most likely directly affected by policy interventions.

Keywords: Financial crises; Credit; Liquidity (Economics) (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-fmk
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Journal Article: How did the financial crisis alter the correlations of U.S. yield spreads? (2014)
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DOI: 10.20955/wp.2013.005

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