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High-Frequency Movements of the Term Structure of Interest Rates of the United States: The Role of Oil Market Uncertainty

Elie Bouri (), Rangan Gupta (), Clement Kyei and Sowmya Subramaniam ()
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Sowmya Subramaniam: Indian Institute of Management Lucknow, Prabandh Nagar off Sitapur Road, Lucknow, Uttar Pradesh 226013, India

No 202085, Working Papers from University of Pretoria, Department of Economics

Abstract: Using daily data from 3rd January, 2001 to 17th July, 2020, we analyse the impact of oil market uncertainty, computed based on realized volatility of 5-minute intraday oil returns, on the level, slope and curvature factors derived from the term structure of interest rates of the United States (US) covering maturities of 1 to 30 years. The results of the linear Granger causality tests detect no evidence of predictability of oil uncertainty on the three latent factors. However, evidence of nonlinearity and structural breaks indicates misspecification of the linear model. Accordingly, we use a data-driven approach, the nonparametric causality in-quantiles test, which is robust to misspecification due to nonlinearity and regime change. Notably, this test allows us to model the entire conditional distribution of the level, slope and curvature factors, and hence accommodate, via the lower quantiles, the zero lower bound situation observed in our sample period. Using this robust test, we find overwhelming evidence of causality from oil uncertainty for the entire conditional distribution of the three factors, suggesting the predictability of the entire US term structure based on information contained in oil market volatility. Our results have important implications for academics, investors and policymakers.

Keywords: US Term Structure of Interest Rates; Yield Curve Factors; Oil Market Uncertainty; Causality-in-Quantiles Test (search for similar items in EconPapers)
JEL-codes: C22 C32 E43 Q41 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2020-09
New Economics Papers: this item is included in nep-ene, nep-mac and nep-rmg
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