Explaining European Short-term Interest Rate Differentials: An Application of Tobin's Portfolio Theory
AbstractThis paper seeks to identify potential determinants of short interest rate differentials across European countries. We rely on the portfolio theory of Tobin to choose our set of risk factors and then assess the ability of these macroeconomic variables to influence both the conditional mean and volatility of interest rate differentials. The macroeconomic variables employed in the analysis may be loosely considered to reflect both domestic government fiscal and monetary policy and international influences.We find significant ARCH-in-mean effects, implying that the conditional volatility of the interest rate differential exerts an important influence in the determination of its mean value. There are also significant short-run contagion effects whereby volatility in the macroeconomic factors is transmitted to the overall riskiness of the differential which in turn impacts upon the level of the differential.
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Bibliographic InfoPaper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1000500.
Length: 18 pages
Date of creation: May 2000
Date of revision:
Interest rate differentials; risk premium; multivariate ARCH;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-10-01 (All new papers)
- NEP-CBA-2001-10-01 (Central Banking)
- NEP-EEC-2001-10-01 (European Economics)
- NEP-FMK-2001-10-01 (Financial Markets)
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