A Yield Spread Perspective on the Great Financial Crisis: Break-Point Test Evidence

42 Pages Posted: 31 Aug 2010

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University, Dept. of Finance; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Yu Man Tam

University of California, Berkeley - Haas School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 30, 2010

Abstract

We use a simple partial adjustment econometric framework to investigate the effects of the crisis on the dynamic properties of a number of yield spreads. We find that the crisis has caused 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 the financial crisis has been over approximately since the Spring of 2009. The financial crisis can be conservatively dated as a August 2007 – June 2009 phenomenon, although some yield spread series seem to point out to an end of the most serious disruptions as early as in December 2008. We uncover evidence that the LSAP program implemented by the Fed in the US 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.

Keywords: yield spreads, credit risk, liquidity risk, break-point tests, partial adjustment models

JEL Classification: E40, E52, C23

Suggested Citation

Guidolin, Massimo and Tam, Yu Man, A Yield Spread Perspective on the Great Financial Crisis: Break-Point Test Evidence (August 30, 2010). Available at SSRN: https://ssrn.com/abstract=1668782 or http://dx.doi.org/10.2139/ssrn.1668782

Massimo Guidolin (Contact Author)

Bocconi University, Dept. of Finance ( email )

Via Roentgen, 1
2nd floor
Milan, MI 20136
Italy

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti 25
Milan, 20136
Italy

Yu Man Tam

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

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