Explosive behaviour and long memory with an application to European bond yield spreads

Kruse, Robinson; Wegener, Christoph

doi:10.1111/sjpe.12179

Scottish J Political Eco

2018

DOI: 10.1111/sjpe.12179

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Explosive behaviour and long memory with an application to European bond yield spreads

Robinson Kruse

Christoph Wegener

Abstract: This article deals with the interplay of explosive behaviour and long memory. We conduct Monte Carlo simulations and study the finite-sample properties of the popular unit root test by Phillips et al. (2011) against explosive alternatives. This test exhibits severe upward size distortions under the presence of strongly autocorrelated residuals. We propose the usage of a set of adjusted critical values which leads to a size-controlled test with increased power. As a complement, we consider the Lagrange Multipli… Show more

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Cited by 3 publications

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References 43 publications

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“…The TARGET 2 debate emerged after several European countries with current account deficits experienced an increase in yield on government bonds. The work by Kruse and Wegener () sheds some new light on this issue by testing for bubbles in those yields during the financial crisis via an assessment of the interplay between explosive behavior and long memory in the corresponding series. Kruse and Wegener () consider Monte Carlo simulations and study the finite‐sample properties of the popular unit root test by Phillips et al .…”

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An empirical assessment of recent challenges in today's financial markets

Beckmann

Czudaj

Koop

2019

Scottish J Political Eco

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The broad range of methods and topics covered in these papers reflects the aim of the workshop and the annual conference to bring together young econometricians and economists. Essentially, all papers deal with important aspects of today's financial markets and relate them to issues faced by policymakers.The lead article contributed by Thornton (2019) deals with two of the most important puzzles in international finance relating to exchange rates: the unbiasedness puzzle -the finding of a marked difference in the conclusion about the forward rate unbiasedness hypothesis depending on whether the hypothesis is tested using the forward rate equation or forward premium equationand the forward premium puzzle-the fact that more often than not the forward premium incorrectly predicts the direction of the subsequent change in the spot rate. Thornton (2019) proposes a solution to both puzzles by highlighting the important of persistence in spot exchange rates and a potential small sample bias for the obtained test results.Most papers in this special issue are devoted to the analysis of up-to-date policy issues. While Thornton (2019) contributes to the debate on the wellestablished link between interest rate and exchange rates, Gehringer and Mayer (2019) investigate the factors determining long-term interest rates using cointegration techniques. They find that central banks have actually had a key influence on the level of long-term interest rates. Gehringer and Mayer (2019) argue that the Austrian school of economics explanation in the model of Wicksell-Mises-Hayek of the credit and business cycle adequately describes recent developments. They also point to a misalignment of market rates due to a lack of necessary knowledge and foresight to set market rates to levels consistent with economic fundamentals.Belke and Osowski (2019) deal with an important policy issue in the context of fiscal policy. They identify and measure fiscal spillovers in EU countries empirically using a global vector autoregression (GVAR) model. To account for effects on financial markets, the set of variables also includes 10year interest yields and exchange rates. Their empirical setting contains

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confidence: 99%

An empirical assessment of recent challenges in today's financial markets

Beckmann

Czudaj

Koop

2019

Scottish J Political Eco

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The stability of government bond markets’ equilibrium and the interdependence of lending rates

Rodrigues,

Sibbertsen,

Voges

2024

Empir Econ

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In this paper, we introduce test procedures for no fractional cointegration against possible breaks to a fractional cointegrating relationship in a segment of the data. We base the proposed tests on the supremum of the Hassler and Breitung (Econom Theor 22(6):1091–1111, 2006) test statistic for no cointegration over possible breakpoints in the long-run equilibrium. We show that the new tests correctly standardized converge to the supremum of a Chi-squared distribution and that this convergence is uniform. An in-depth Monte Carlo analysis provides results on the finite sample performance of our tests. We then use the new procedures to investigate whether there was a dissolution of fractional cointegrating relationships between the yields of government bonds of eleven EMU countries (Spain, Italy, Portugal, Ireland, Greece, Belgium, Austria, Finland, the Netherlands, Germany and France) as a consequence of the European debt crisis and to understand the degree of interdependence of lending rates to non-financial corporations across these eleven countries.

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Explosivity and Time-Varying Granger Causality: Evidence from the Bubble Contagion Effect of COVID-19-Induced Uncertainty on Manufacturing Job Postings in the United States

et al. 2022

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This study evaluates the explosive behavior and Granger causality episodes in manufacturing job postings in the United States (JOBPUS) and COVID-19-induced uncertainty (COVIDEMV). This study applied the novel unit root tests with explosive behavior, and the novel time-varying Granger causality test for a sample period ranging from 1 January 2020 to 29 July 2022. Further, this study used date stamping to identify the subperiods of the explosive behavior and causality. The findings revealed that JOBPUS exhibits explosive behavior, with several episodes of exuberance (bubbles) across the sample period while COVIDEMV does not exhibit explosivity during the period. However, the results of the causality provide evidence of bidirectional causality, with several episodes between the variables. Moreover, the episodes of the explosivity and causality coincide with significant episodes in the history of the COVID-19 pandemic worldwide and in the United States particularly, such as the date when United States recorded a COVID-19-related death toll of over 100,000 people for the first time, after the presidential election, after Halloween celebrations, after the discovery and administration of COVID-19 vaccines as well as the discovery of the Delta and the Omicron variants of COVID-19. Therefore, the time-series characteristics of JOBPUS and its causal nexus with COVIDEMV largely depend on the intensity of the instability caused by the pandemics. Hence, explosivity and time-varying causal behavior should necessarily be accounted for when modelling the job market conditions in the United States, particularly during pandemic-related crises.

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Explosive behaviour and long memory with an application to European bond yield spreads

Cited by 3 publications

References 43 publications

An empirical assessment of recent challenges in today's financial markets

An empirical assessment of recent challenges in today's financial markets

The stability of government bond markets’ equilibrium and the interdependence of lending rates

Explosivity and Time-Varying Granger Causality: Evidence from the Bubble Contagion Effect of COVID-19-Induced Uncertainty on Manufacturing Job Postings in the United States

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