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Federal Reserve Bank of Dallas
Globalization Institute Working Papers
Mildly Explosive Dynamics in U.S. Fixed Income Markets
Silvio Contessi
Pierangelo De Pace
Massimo Guidolin
Abstract

We use a recently developed right-tail variation of the Augmented Dickey-Fuller unit root test to identify and date-stamp periods of mildly explosive behavior in the weekly time series of seven U.S. fixed income yield spreads between September 2002 and January 2015. We find statistically significant evidence of such behavior in six of these spreads. Mild explosivity migrates from short-term funding markets to more volatile medium- and long-term markets during the Great Financial Crisis. For some markets, we statistically validate the conjecture, originally suggested by Gorton (2009a,b), that the financial panic of 2007 initially migrated from segments of the ABX market to other U.S. fixed income markets.


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Silvio Contessi & Pierangelo De Pace & Massimo Guidolin, Mildly Explosive Dynamics in U.S. Fixed Income Markets, Federal Reserve Bank of Dallas, Globalization Institute Working Papers 324, 01 Aug 2017, revised 04 Feb 2019.
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Keywords: Finance; investment analysis; fixed income markets; yield spreads; mildly explosive behavior
DOI: 10.24149/gwp324r1
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