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The International Financial Market and U.S. Interest Rates

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  • David G. Hartman
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    Abstract

    This paper examines the linkages between the Eurodollar and U.S. domestic financial markets. Despite the fact that these markets are characterized by rapid arbitrage of interest rate differentials, it is shown that using weekly data allows the isolation of significant fluctuations being transmitted between markets in both directions. That is, financial markets in the U.S. are affected significantly by foreign events and the Eurodollar market is significantly affected by events occurring in the U.S. Since a moderate amount of arbitrage occurs within a week's time and because there is no way to determine the source of any disturbances which affect both interest rates simultaneously, it is impossible to reach precise conclusions about the causes of historical variation in the rates. However, this paper provides evidence that at most forty percent of the variation in Eurodollar interest rates over the 1975-1978 period can be traced to domestic U.S. sources and that between about one-fifth and two-thirds of the variation in domestic rates can be traced to foreign sources.

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    File URL: http://www.nber.org/papers/w0598.pdf
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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0598.

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    Date of creation: Jun 1984
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    Handle: RePEc:nbr:nberwo:0598

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    1. Kwack, Sung Y, 1971. "The Structure of International Interest Rates: An Extension of Hendershott's Tests," Journal of Finance, American Finance Association, vol. 26(4), pages 897-900, September.
    2. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
    3. Rodney L. Jacobs & Edward E. Leamer & Michael P. Ward, 1978. "Difficulties with Testing for Causation," UCLA Economics Working Papers 117, UCLA Department of Economics.
    4. Rodney H. Mills, Jr., 1973. "Structural change in the Eurodollar market: evidence from a two- equation model," International Finance Discussion Papers 33, Board of Governors of the Federal Reserve System (U.S.).
    5. Chung Lee, 1977. "A Survey of the literature on the determinants of foreign portfolio investments in the United States," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 113(3), pages 552-569, September.
    6. Brunner, Karl & Meltzer, Allan H., 1979. "Three aspects of policy and policymaking: Knowledge, data and institutions," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 10(1), pages 1-7, January.
    7. Robert Aliber, 1978. "The integration of National financial markets: A review of theory and findings," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 114(3), pages 448-480, September.
    8. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December.
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    Cited by:
    1. Simpson, J.L. & Evans, J.P., 2005. "Systemic risk in the major Eurobanking markets: Evidence from inter-bank offered rates," Global Finance Journal, Elsevier, vol. 16(2), pages 125-144, December.
    2. Hsieh, Nigel C. T. & Lin, Antsong & Swanson, Peggy E., 1999. "Global money market interrelationships," International Review of Economics & Finance, Elsevier, vol. 8(1), pages 71-85, January.
    3. William A. Allen & Richhild Moessner, 2010. "Central Bank co-operation and International liquidity in the financial crisis of 2008-09," FMG Special Papers sp187, Financial Markets Group.
    4. Bremnes, Helge & Gjerde, Oystein & Saettem, Frode, 1997. "A multivariate cointegration analysis of interest rates in the Eurocurrency market," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 767-778, September.
    5. de Jong, Pieter J. & Swanson, Peggy E., 2006. "The Euro deposit market in a global perspective," Global Finance Journal, Elsevier, vol. 16(3), pages 354-365, March.
    6. Jeffrey A. Frankel & Kenneth A. Froot, 1987. "The Dollar as an Irrational Speculative Bubble: A Tale of Fundamentalisists," NBER Working Papers 1854, National Bureau of Economic Research, Inc.
    7. Park, Jinwoo, 2001. "Information flows between non-deliverable forward (NDF) and spot markets: Evidence from Korean currency," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 363-377, August.
    8. Wai-Wah Cheung, Daniel & Wan-Sing Hung, Bill, 1998. "The international transmission of US, Eurodollar and Asian dollar interest rates: Some empirical evidence," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 77-86, May.
    9. Wai-Chung Lo & Hung-Gay Fung & Morse, Joel N., 1995. "A note on Euroyen and domestic yen interest rates," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1309-1321, October.
    10. Jeffrey A. Frankel, 1986. "International Capital Mobility and Crowding Out in the U.S. Economy: Imperfect Integration of Financial Markets or of Goods Markets?," NBER Working Papers 1773, National Bureau of Economic Research, Inc.
    11. Clinebell, John M. & Kahl, Douglas R. & Stevens, Jerry L., 2000. "Integration of LIBOR and Treasury bill yields over different monetary regimes," Global Finance Journal, Elsevier, vol. 11(1-2), pages 17-30.
    12. Lin, Antsong & Swanson, Peggy E., 1997. "The U.S. dollar in global money markets: A multivariate cointegration analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(1), pages 139-150.
    13. Anoruo, Emmanuel & Ramchander, Sanjay & Thiewes, Harold F., 2002. "International linkage of interest rates: Evidence from the emerging economies of Asia," Global Finance Journal, Elsevier, vol. 13(2), pages 217-235.
    14. Fung, Hung-Gay & Jang, Hoyoon & Lee, Wai, 1997. "International interest rate transmission and volatility spillover," International Review of Economics & Finance, Elsevier, vol. 6(1), pages 67-75.
    15. Swanson, Peggy E., 2003. "The interrelatedness of global equity markets, money markets, and foreign exchange markets," International Review of Financial Analysis, Elsevier, vol. 12(2), pages 135-155.
    16. Tan Hock Ann, Albert & Alles, Lakshman, 2000. "An examination of causality and predictability between Australian domestic and offshore interest rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 83-106, January.
    17. Choi, Hyunyoung & Finnerty, Joseph, 2006. "Impact study on the interest rate futures market," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(4), pages 495-512, September.
    18. Apergis, Nicholas, 1997. "Domestic and eurocurrency yields: Any exchange rate link? Evidence from a VAR model," Journal of Policy Modeling, Elsevier, vol. 19(1), pages 41-49, February.

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