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

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  • Nuno Cassola
  • Claudio Morana

Abstract

The paper studies the euro area money market from a microstructure perspective. The focus is on the empirical estimation of the factors underlying the volatility of the overnight interest rate and its transmission along the money market yield curve. Two sources of volatility are separated out, one related to the institutional features of the operational framework and payments system, and the other, related to the impact of policy decisions. A novel data set is used composed of hourly observations and covering several short-term interest rates. The sample runs from 4/12/2000 to 31/05/2002. Two common long-memory factors are found to drive the volatility processes. The first explains the long-memory dynamics of the shortest maturity. The other explains the transmission of volatility to other maturities. It is shown that announcements of interest rate changes exercise the strongest impact on the volatility of the shortest maturities. Persistent effects of liquidity shortages that are transmitted along the money market yield curve are documented. However, these effects are not the rule and can be explained by exceptional circumstances.

Suggested Citation

  • Nuno Cassola & Claudio Morana, 2006. "Volatility of interest rates in the euro area: Evidence from high frequency data," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 513-528.
  • Handle: RePEc:taf:eurjfi:v:12:y:2006:i:6-7:p:513-528
    DOI: 10.1080/13518470500162758
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    Cited by:

    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.
    2. Filippo COSSETTI & Francesco GUIDI, 2009. "ECB Monetary Policy and Term Structure of Interest Rates in the Euro Area: an Empirical Analysis," Working Papers 334, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    3. Gaspar, Vítor & Pérez-Quirós, Gabriel & Rodriguez Mendizabal, Hugo, 2004. "Interest Rate Determination in the Interbank Market," CEPR Discussion Papers 4516, C.E.P.R. Discussion Papers.
    4. Caroline Jardet & Gaelle Le Fol, 2010. "Euro money market interest rate dynamics and volatility: how they respond to recent changes in the operational framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(4), pages 316-330.
    5. Aneta Hryckiewicz & Piotr Mielus & Karolina Skorulska & Malgorzata Snarska, 2018. "Does a bank levy increase frictions on the interbank market?," Working Papers 2018-033, Warsaw School of Economics, Collegium of Economic Analysis.
    6. Gaspar, Vítor & Pérez Quirós, Gabriel & Rodríguez Mendizábal, Hugo, 2008. "Interest rate dispersion and volatility in the market for daily funds," European Economic Review, Elsevier, vol. 52(3), pages 413-440, April.
    7. Julius Moschitz, 2009. "Monetary policy implementation and the Euro area money market," Applied Financial Economics, Taylor & Francis Journals, vol. 19(1), pages 39-57.
    8. Benito, Francis & Leon, Angel & Nave, Juan, 2007. "Modeling the Euro overnight rate," Journal of Empirical Finance, Elsevier, vol. 14(5), pages 756-782, December.
    9. Cassola, Nuno & Morana, Claudio, 2010. "Comovements in volatility in the euro money market," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 525-539, April.
    10. 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).
    11. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank.
    12. 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.
    13. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 708-723, December.
    14. Francisco Alonso & Roberto Blanco, 2005. "Is the volatility of the EONIA transmitted to longer-term euro money market interest rates?," Working Papers 0541, Banco de España.
    15. Asif Mahmood, 2016. "Transmission of Volatility of Money Market Overnight Repo Rate along the Yield Curve in Pakistan," SBP Research Bulletin, State Bank of Pakistan, Research Department, vol. 12, pages 1-18.
    16. Bank for International Settlements, 2006. "The recent behaviour of financial market volatility," BIS Papers, Bank for International Settlements, number 29, May.

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    More about this item

    Keywords

    Money market microstructure; stochastic volatility; fractional integration and cointegration;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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