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Comovements in volatility in the euro money market

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Author Info
Nuno Cassola () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Claudio Morana () (International Centre for Economic Research (ICER, Torino) and University of Piemonte Orientale, Faculy of Economics and Quantitative Methods, Via Perrone 18, 28100, Novara, Italy.)
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. Two common long memory factors are found to drive the temporal evolution of the volatility processes. The first factor shows how persistent volatility shocks are trasmitted along the term structure, while the second factor points to excess persistent volatility at the longer end of the yield curve, relative to the shortest end. Finally, impulse response analysis and forecast error variance decomposition point to forward transmission of shocks only, involving the closest maturities. JEL Classification: C14, C63, E41.

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Paper provided by European Central Bank in its series Working Paper Series with number 703.

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Length: 52 pages
Date of creation: Dec 2006
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Handle: RePEc:ecb:ecbwps:20060703

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Related research
Keywords: Money market interest rates; liquidity effect; realized volatility; fractional integration and cointegration; fractional vector error correction model.;

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Full references

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.)

  1. 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. [Downloadable!]
  2. 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 Department. [Downloadable!]
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