Causal Slaving of the U.S. Treasury Bond Yield Antibubble by the Stock Market Antibubble of August 2000

Details Causal Slaving of the U.S. Treasury Bond Yield Antibubble by the Stock Market Antibubble of August 2000 Causal Slaving of the U.S. Treasury Bond Yield Antibubble by the Stock Market Antibubble of August 2000

2003-12-27

arxiv.org/abs/cond-mat/0312658v1

Physica A 337, 586-608 (2004).

Physics

Condensed Matter

Statistical Mechanics

26 Elsevier Latex pages including 11 eps figures (color online)

Scientific paper

10.1016/j.physa.2004.02.009

Using the descriptive method of log-periodic power laws (LPPL) based on a theory of behavioral herding, we use a battery of parametric and non-parametric tests to demonstrate the existence of an antibubble in the yields with maturities larger than 1 year since October 2000. The concept of ``antibubble'' describes the existence of a specific LPPL pattern that is thought to reflect collective herding effects. From the dependence of the parameters of the LPPL formula as a function of yield maturities and using lagged cross-correlation calculations between the S&P 500 and bond yields, we find strong evidence for the following causality: Stock Market $\to$ Fed Reserve (Federal funds rate) $\to$ short-term yields $\to$ long-term yields (as well as a direct and instantaneous influence of the stock market on the long-term yields). Our interpretation is that the FRB is ``causally slaved'' to the stock market (at least for the studied period), because the later is (taken as) a proxy for the present and future health of the economy.

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