LPPL Evidence for Stock Market Influence on Treasury Yields

Summary

The paper applies log-periodic power law (LPPL) patterns, interpreted through a behavioral herding framework, to U.S. Treasury yields. It reports evidence of an antibubble pattern in yields with maturities above one year beginning in October 2000. In this framework, an antibubble is a particular LPPL form proposed to capture collective herding behavior; the authors test for it using parametric and non-parametric procedures.

To examine relationships across markets and maturities, the study analyzes how fitted LPPL parameters vary by yield maturity and uses lagged cross-correlations between the S&P 500 and bond yields. The authors interpret the results as a causal chain from the stock market through Federal Reserve policy and short-term yields to longer-term yields, alongside a direct influence of stocks on long yields. This is the authors’ interpretation of historical patterns, including the idea that equities proxy for economic outlook. The provided account does not establish that LPPL patterns prove causality or that the relationship applies beyond the period studied.

Key ideas

• The study uses LPPL patterns to identify a proposed antibubble in longer-maturity Treasury yields.
• Its evidence combines parametric and non-parametric tests with maturity comparisons and lagged cross-correlations.
• The authors propose influence flowing from equities through policy and shorter yields to longer yields.
• The findings support a historical interpretation and do not by themselves prove causal mechanisms or broader applicability.

Tags

# 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









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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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.