The 2011 US Debt Ceiling Debacle – Multivariate GARCH-in-Mean Analysis

Bruce Q. Budd and Declan McCrohan

The purpose of this paper is to determine whether market crises in the U.S. and the increased volatility that they generate in the U.S. equity market, lead to similar increases in equity market volatilities in ten countries which are major foreign holders of U.S. Debt. The spillover effects of cluster volatility are observed in the context of two significant U.S. market crises: the financial crisis of 2007 and the threat of the U.S. government refusing to raise its "debt ceiling" and subsequently defaulting on its debt in 2011. Results from the GARCH-in-Mean model analysis suggest signals from the US market to most of these countries are statistically significant signifying growing global equity market integration.

JEL Codes: F34, G10

DOI : http://dx.doi.org/10.21102/jbpr.2015.12.102.01