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A yield spread perspective on the great financial crisis: Break-point test evidence

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  • Guidolin, Massimo
  • Tam, Yu Man

Abstract

We use a simple partial adjustment econometric framework to investigate the effects of financial crises on the dynamic properties of yield spreads. We find that crises manifest themselves in the form of substantial disruptions revealed by changes in the persistence of the shocks to spreads as much as by in their unconditional mean levels. Formal breakpoint tests confirm that in the U.S. the Great Financial Crisis has been over approximately since the Spring of 2009 and provide a conservative dating centered around the August 2007–June 2009 dates. However, some yield spread series point to an end of the most serious disruptions as early as in December 2008. Some symptoms of an impending crisis re-appear instead in the second half of 2011. We also uncover evidence that the LSAP program implemented by the Fed in the U.S. residential mortgage market has been effective, in the sense that the risk premia in this market have been uniquely shielded from the disruptive effects of the crisis.

Suggested Citation

  • Guidolin, Massimo & Tam, Yu Man, 2013. "A yield spread perspective on the great financial crisis: Break-point test evidence," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 18-39.
  • Handle: RePEc:eee:finana:v:26:y:2013:i:c:p:18-39
    DOI: 10.1016/j.irfa.2012.05.001
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    More about this item

    Keywords

    Yield spreads; Credit risk; Liquidity risk; Break-point tests; Partial adjustment models;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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