Infectious disease-related uncertainty and the safe-haven characteristic of US treasury securities
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Date
Authors
Gupta, Rangan
Subramaniam, Sowmya
Bouri, Elie
Ji, Qiang
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier
Abstract
This paper analyses the impact of a newspaper-based uncertainty associated with infectious diseases (EMVID) on the level, slope and curvature factors derived from the term structure of interest rates of the US covering maturities from 1 year to 30 years. Results from nonlinearity and structural break tests indicate the misspecification of the linear causality model and point to the suitability of applying a time-varying model. A DCC-MGARCH framework is thus applied and the results indicate significant predictability of the three latent factors from the EMVID index at each point of the entire sample, and also provide evidence of instantaneous spillover. Finally, the results of measuring safe-haven characteristic of the US Treasury market show that US treasuries with long-term maturities as captured by the level factor are consistently negatively correlated with the EMVID index, i.e., they act as a safe-haven, with the slope factor (medium-term maturities) following this trend since 2007, and the slope factor (short-term maturities) also showing signs of a safe-haven since May of 2020. Overall, the findings provide reasonable evidence that US Treasury securities can hedge the risks associated with the financial market in the wake of the current COVID-19 pandemic.
Description
Keywords
Yield curve factors, Financial market uncertainty, Infectious diseases, COVID-19 pandemic, Coronavirus disease 2019 (COVID-19), Time-varying Granger causality
Sustainable Development Goals
Citation
Gupta R., Subramaniam S., Bouri E. & Ji Q. 2021, 'Infectious disease-related uncertainty and the safe-haven characteristic of US treasury securities', International Review of Economics and Finance, vol. 71, pp. 289-298, doi : 10.1016/j.iref.2020.09.019.