The dynamic interactions between the U.S. Treasury bill and Eurodollar futures markets: A focus on pre- and post- stock crash periods

In this paper, we examine the periods before and after the stock market crashes in October 1987 and October 1989 to determine whether the price lead-lag relationship, the volatility spillovers and asymmetric effects changed between the three-month U.S. Treasury Bill (TB) and the three-month Eurodollar (ED) money markets. In addition, we explore whether the investors' learning effect changed. The Co-integration of Engle and Granger (1987) is applied to test the long-term equilibrium between the TB and ED futures. Additionally, in order to consider the heteroskedasticity of the TB and ED futures prices, the bivariate EGARCH Model with the Error Correction Model (ECM) techniques is utilized to examine the short-term dynamic interactions of price and volatility between the TB and ED futures markets. Empirical results indicate that the lead-lag (feedback) relationships exist between TB and ED futures prices (or returns) after the stock crashes. Additionally, there exists a volatility asymmetry in both TB and ED futures markets with volatility spillovers to the other market after the stock crashes, implying that the speeds of the response for good news and bad news are different in both markets. Obviously, investors pay more attention to the information after the stock crashes in order to secure any profit in the money market.