On inter-arrival times of bond market extreme events. An application to seven European markets

This paper employs a co-exceedance approach to construct duration data that reflect the inter-arrival times of bond market extreme events. Conditional duration models that allow duration between distress events to depend linearly or nonlinearly on its past history are estimated and evaluated. We find evidence of strong persistence along with non-monotonic hazard rates. Further, we obtain statistical significant results when we allow duration to depend linearly on past information variables that capture global distress factors, country specific financial distress factors and assess the importance of flight-to-quality and liquidity factors. In addition, we find that mean duration levels of tranquility spells or equivalently the distress events intensity is subject to long run shifts that affect persistence evaluation and imply a co-movement in the tails of the distribution of short-run yield changes. When mean shifts are taken into account, duration persistence almost vanishes while the global distress factor and the liquidity measure no longer affect conditional duration. Copyright Springer Science+Business Media New York 2015