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The International Financial Market and U.S. Interest Rates

Listed author(s):
  • David G. Hartman
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    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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    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: Dec 1980
    Publication status: published as Hartman, David G. "The International Financial Market and U.S. Interest Rates." Journal of International Money and Finance. Vol. 3, (April 1984), pp . 91-103.
    Handle: RePEc:nbr:nberwo:0598
    Note: ME ITI IFM
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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. Robert Aliber, 1978. "The integration of National financial markets: A review of theory and findings," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 114(3), pages 448-480, September.
    3. Jacobs, Rodney L & Leamer, Edward E & Ward, Michael P, 1979. "Difficulties with Testing for Causation," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 401-413, July.
    4. 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;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 113(3), pages 552-569, September.
    5. 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.
    6. Rodney H. Mills, 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.).
    7. 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 1009-1044, December.
    8. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
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