Rare disaster risks and volatility of the term-structure of US Treasury Securities : the role of El Niño and La Niña events

Abstract

The purpose of this paper is to determine the impact of rare disaster risks, captured by the El Niño-Southern Oscillation (ENSO) cycle, on the volatility of Treasury securities of the United States (US) involving 1- to 360-month maturities. We use a random coefficient panel-data-based heterogeneous autoregressive-realized variance (HAR-RV) model over the monthly period of 1961:06 to 2019:12, with the monthly RV derived from the sum of squared daily changes in yield within a month. Our results show a positive and statistically significant (at the 1% level) impact of the ENSO cycle on RV, with the results being robust to alternative metrics of the ENSO, consideration of lagged values, and decomposition of the ENSO cycle into El Niño and La Niña phases, with the former having a relatively stronger effect. Based on the panel estimation method using heterogeneous slope coefficients, we find that the impact on the entire term-structure is positive yet stronger at the two-ends and the middle-part of the term-structure. Our findings have important implications for investors in US Treasury securities.