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Nonlinear adjustment between the Eonia and Euribor rates: a two-regime threshold cointegration analysis

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  • Go Tamakoshi
  • Shigeyuki Hamori

Abstract

This article examines the dynamic relationship between two key European short-term interest rates, the Eonia rate (EON) and the 3-month Euribor rate (ER3). Applying a threshold cointegration method developed by Hansen and Seo (2002) to monthly data over the period 1999 to 2011, we confirm that the null hypothesis of linear cointegaration is rejected in favour of a two-regime threshold cointegration model with regime-dependent short-run dynamics. Importantly, we show that an error correlation through a Euribor rate adjustment tends to occur only in an extreme regime, where ER3 increases relative to EON, such as was vigorously implemented immediately after the global financial crisis. In a typical regime, short-run responses are executed, instead, by an Eonia rate adjustment, which is not necessarily consistent with the conventional view that EON should anchor longer-term interest rates.

Suggested Citation

  • Go Tamakoshi & Shigeyuki Hamori, 2014. "Nonlinear adjustment between the Eonia and Euribor rates: a two-regime threshold cointegration analysis," Applied Financial Economics, Taylor & Francis Journals, vol. 24(2), pages 139-143, January.
    • Handle: RePEc:taf:apfiec:v:24:y:2014:i:2:p:139-143
    DOI: 10.1080/09603107.2013.868586
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    References listed on IDEAS

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    1. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
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    6. repec:bla:manchs:v:67:y:1999:i:0:p:1-35 is not listed on IDEAS
    7. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, vol. 110(2), pages 293-318, October.
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    1. Hlebik Sviatlana & Verga Giovanni, 2015. "The European Central Bank Quantitative Policy and Its Consistency with the Demand for Liquidity," Scientific Annals of Economics and Business, Sciendo, vol. 62(3), pages 425-451, November.

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