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Modeling The Euro Overnight Rate

  • Ángel León

    ()

    (Universidad de Alicante)

  • Francis Benito

    (Universidad de Alicante)

  • Juan Nave

    (Universidad de Castilla-La Mancha)

Registered author(s):

    This paper describes the evolution of the daily Euro overnight interestrate (EONIA) by using several models containing the jump component such asa single regime ARCH-Poisson-Gaussian process, with either a piecewisefunction or an autoregressive conditional specification (ARJI) for the jumpintensity, and a two regime-switching process with jumps and time varyingtransition probabilities. To model the jump intensity, we include the followingeffects which are significant for the occurrence of jumps such as: (1) the end ofmaintenance period effect because of reserve requirements, (2) the end ofmonth effect, also known as the calendar day effect, caused mainly by theaccounting adjustments and finally, (3) the meeting effect caused by thefortnightly meetings of the Governing Council of the European Central Bank(ECB). These effects lead to a better performance and several of them are alsoincluded for the behavior of the transition probabilities. Since the target of theECB is keeping the EONIA rate close to the official rate, we have modeled theconditional mean of the overnight rate series as a reversion process to theofficial rate distinguishing two alternative speeds of reversion, in concrete, adifferent speed if EONIA is higher or lower than the official rate. We also studythe jumps of the EONIA rate around the ECB’s meetings by using the ex-postprobabilities of the ARJI model. Finally, we develop an out-of-sampleforecasting analysis to measure the performance of the different candidatemodels.

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    File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2006-11.pdf
    File Function: Fisrt version / Primera version, 2006
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    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2006-11.

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    Length: 53 pages
    Date of creation: Jun 2006
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:2006-11
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    22. Ang, Andrew & Bekaert, Geert, 2002. "Short rate nonlinearities and regime switches," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1243-1274, July.
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