Testing for changing persistence in US Treasury on/off spreads under weighted-symmetric estimation

L. Vanessa Smith; D.N. Tambakis

doi:10.1080/13518470601025276

Testing for changing persistence in US Treasury on/off spreads under weighted-symmetric estimation

L. Vanessa Smith, D.N. Tambakis

Economics

Research output: Contribution to journal › Article › peer-review

Abstract

The debt management policy changes of 1998–2001 and subsequent reversal of the US government's fiscal position have prompted research on the dynamics of the US Treasury bond market. The recursive break test procedure of Leybourne et al. (2003) is extended by using weighted-symmetric estimation to detect a single change in persistence in US Treasury on/off spreads. It is found that a significant change from I(0) to I(1) occurred in the late 1990s, which appears to be linked to changes in the US Treasury's debt management policy. Monte Carlo evidence shows that correcting for conditional heteroscedasticity in the data can successfully deal with the tests being oversized, albeit at a considerable loss in power for smaller sample sizes and large short-run variation in volatility. It is therefore advisable mainly for large sample sizes.

Original language	English
Pages (from-to)	75-89
Journal	European Journal of Finance
Volume	14
Issue number	2
Early online date	20 Feb 2008
DOIs	https://doi.org/10.1080/13518470601025276
Publication status	Published - Feb 2008

Keywords

persistence
unit root tests
break point
Monte Carlo simulation
US Treasury bonds
liquidity

Access to Document

10.1080/13518470601025276

Cite this

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title = "Testing for changing persistence in US Treasury on/off spreads under weighted-symmetric estimation",

abstract = "The debt management policy changes of 1998–2001 and subsequent reversal of the US government's fiscal position have prompted research on the dynamics of the US Treasury bond market. The recursive break test procedure of Leybourne et al. (2003) is extended by using weighted-symmetric estimation to detect a single change in persistence in US Treasury on/off spreads. It is found that a significant change from I(0) to I(1) occurred in the late 1990s, which appears to be linked to changes in the US Treasury's debt management policy. Monte Carlo evidence shows that correcting for conditional heteroscedasticity in the data can successfully deal with the tests being oversized, albeit at a considerable loss in power for smaller sample sizes and large short-run variation in volatility. It is therefore advisable mainly for large sample sizes.",

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AB - The debt management policy changes of 1998–2001 and subsequent reversal of the US government's fiscal position have prompted research on the dynamics of the US Treasury bond market. The recursive break test procedure of Leybourne et al. (2003) is extended by using weighted-symmetric estimation to detect a single change in persistence in US Treasury on/off spreads. It is found that a significant change from I(0) to I(1) occurred in the late 1990s, which appears to be linked to changes in the US Treasury's debt management policy. Monte Carlo evidence shows that correcting for conditional heteroscedasticity in the data can successfully deal with the tests being oversized, albeit at a considerable loss in power for smaller sample sizes and large short-run variation in volatility. It is therefore advisable mainly for large sample sizes.

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