Journal of Risk

High-frequency movements of the term structure of US interest rates: the role of oil market uncertainty

Elie Bouri, Rangan Gupta, Clement Kyei and Sowmya Subramaniam

  • The authors study the impact of oil volatility on the latent factors of the US Treasury term structure.
  • No evidence of causality is found when using a linear model.
  • A quantile approach is applied that considers the entire conditional distribution.
  • Oil volatility holds predictive power.

Using daily data from January 3, 2001 to July 17, 2020 we analyze the impact of oil market uncertainty (computed based on the realized volatility of five-minute intraday oil returns) on the level, slope and curvature factors derived from the term structure of US interest rates covering maturities from 1 to 30 years. The results of the linear Granger causality tests show no evidence of the predictive ability of oil uncertainty for the three latent factors. However, evidence of nonlinearity and structural breaks indicates misspecification of the linear model. Accordingly, we use a data-driven approach: the nonparametric causality-in-quantiles test, which is robust to misspecification due to nonlinearity and regime change. Notably, this test allows us to model the entire conditional distribution of the level, slope and curvature factors, and hence accommodate, via the lower quantiles, the zero lower bound situation observed in our sample period. Using this robust test, we find overwhelming evidence of causality from oil uncertainty for the entire conditional distribution of the three factors, suggesting the predictability of the entire US term structure based on information contained in oil market volatility. Our results have important implications for academics, investors and policy makers.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here