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

Abstract

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 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 - Fed Reserve (Federal funds rate) - short-term yields - 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.