Volatility of interest rates in the euro area: evidence from high frequency data

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Volatility of interest rates in the euro area: evidence from high frequency data

Author Info

Claudio Morana () (University of Piemonte Orientale, Via Perrone 18, 28100 Novara, Italy.)
Nuno Cassola () (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany.)

Abstract

This paper estimates the factors underlying the volatility of the euro overnight interest rate and its transmission along the euro area money market yield curve. A new multivariate unobserved components model is proposed allowing for both long-memory and stationary cyclical dynamics. Using hourly data the estimates show repetitive intradaily and monthly patterns that can be explained by the microstructure of the money market and the institutional features of the Eurosystem's operational framework for monetary policy implementation. Strong persistence is detected in all log-volatility processes and two common long-memory factors are extracted. The first factor explains the long-memory dynamics of the shortest maturity. The second factor explains the transmission of volatility along the money market yield curve. We find evidence that most liquidity effects are cyclical, confined to the end of reserve maintenance periods, and are not transmitted along the money market yield curve. JEL Classification: C32; E43; F30; G10.

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Paper provided by European Central Bank in its series Working Paper Series with number 235.

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Length: 74 pages
Date of creation: Jun 2003
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Handle: RePEc:ecb:ecbwps:20030235

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Vítor Gaspar & Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2004. "Interest rate determination in the interbank market," Working Paper Series 351, European Central Bank. [Downloadable!]
Other versions:
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- Gaspar, Vítor & Pérez-Quirós, Gabriel & Rodriguez, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Vitor Gaspar & Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2004. "Interest Rate Determination in the Interbank Market," UFAE and IAE Working Papers 603.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
Francisco Alonso & Roberto Blanco, 2005. "Is the volatility of the EONIA transmitted to longer-term euro money market interest rates?," Banco de EspaÃ±a Working Papers 0541, Banco de España. [Downloadable!]
Ángel León & Francis Benito & Juan Nave, 2006. "Modeling The Euro Overnight Rate," Working Papers. Serie AD 2006-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie). [Downloadable!]
Julius Moschitz, 2004. "Monetary Policy Implementation and Volatility in the Euro Area Money Market," Money Macro and Finance (MMF) Research Group Conference 2004 95, Money Macro and Finance Research Group. [Downloadable!]

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