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Comovements in volatility in the euro money market

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  • Cassola, Nuno
  • Morana, Claudio

Abstract

This paper assesses the sources of volatility persistence in Euro Area money market interest rates and the existence of linkages relating volatility dynamics. The main findings of the study are as follows. Firstly, there is evidence of stationary long memory, of similar degree, in all series. Secondly, there is evidence of fractional cointegration relationships relating all series, except the overnight rate. The common long memory factor analysis points to a two-factor volatility curve. The most important factor, in terms of proportion of total variance explained, can be interpreted as a level factor (64% of total variance), while the other as a slope factor (13% of total variance). Impulse response analysis and forecast error variance decomposition finally point to non significant forward transmission of liquidity shocks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 3 (April)
Pages: 525-539

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:3:p:525-539

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Money market interest rates Liquidity effect Realized volatility Fractional integration and cointegration Fractional vector error correction model;

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Citations

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Cited by:
  1. Morana, Claudio, 2009. "On the macroeconomic causes of exchange rate volatility," International Journal of Forecasting, Elsevier, vol. 25(2), pages 328-350.
  2. Shimotsu, Katsumi, 2012. "Exact local Whittle estimation of fractionally cointegrated systems," Journal of Econometrics, Elsevier, vol. 169(2), pages 266-278.
  3. Cassola, Nuno & Morana, Claudio, 2010. "Comovements in volatility in the euro money market," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 525-539, April.
  4. Gilles De Truchis & Benjamin Keddad, 2014. "On the Risk Comovements between the Crude Oil Market and the U.S. Dollar Exchange Rates," Working Papers halshs-00999225, HAL.
  5. Gilles de Truchis & Benjamin Keddad, 2013. "Analyzing Financial Integration in East Asia through Fractional Cointegration in Volatilities," AMSE Working Papers 1346, Aix-Marseille School of Economics, Marseille, France, revised Sep 2013.
  6. Silvio Colarossi & Andrea Zaghini, 2009. "Gradualism, transparency and the improved operational framework: a look at the overnight volatility transmission," Temi di discussione (Economic working papers) 710, Bank of Italy, Economic Research and International Relations Area.
  7. Claudio Morana, 2007. "Estimating, Filtering and Forecasting Realized Betas," ICER Working Papers - Applied Mathematics Series 6-2007, ICER - International Centre for Economic Research.
  8. Brämer, Patrick & Gischer, Horst & Richter, Toni & Weiß, Mirko, 2013. "Competition in banks’ lending business and its interference with ECB monetary policy," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 25(C), pages 144-162.
  9. Alain Durré & Stefano Nardelli, 2008. "Volatility in the Euro area money market: effects from the monetary policy operational framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 307-322.

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